Oil spike bodes well for Malaysian economy

Recent rise in crude prices strengthening the ringgit

PETALING JAYA: The continued spike in crude oil prices has strengthened the ringgit further against the US dollar.

Yesterday, the international benchmark Brent crude oil soared to US$63.52 per barrel a day, the highest in 13 months, as fears of heightened tensions in the Middle East, as well as hopes that a US stimulus and an easing of lockdowns will boost fuel demand this year.

The price was the highest level since January 2020, when Brent crude oil last averaged US$64 per barrel before falling to an average of US$18 per barrel in April, which was the lowest in 22 years, due to the plunge in consumption amid the lockdown measures across the globe and Covid-19 pandemic fallout.

Meanwhile, the ringgit continues to strengthen further from last Thursday to RM4.03 against the US dollar driven by the higher crude oil prices.

To put it into perspective, a higher crude oil price is a boon for Malaysia’s fiscal position due to the government’s Budget 2021 assumption of US$45-US$55 per barrel, which is below than the current prices of above US$63.

Sunway University professor of economics Yeah Kim Leng (pic below) said the recent spike in crude oil price is a positive for the Malaysian economy.

“The higher petroleum revenue will allay concerns over possible revenue shortfall and wider fiscal deficit due to the higher pandemic relief spending, ” he told StarBiz.

While the higher crude oil prices would add pressure on consumer inflation due to the rise in pump prices, Yeah said this would not be a major concern given weak consumer demand.

“Nonetheless, the consumer price index (CPI) is expected to turn around sooner due to the firming oil price although the rise will be moderated by a stronger ringgit that will lower imported inflation, ” Yeah said.

Malaysia’s inflation, measured by CPI declined 1.4% in December 2020 from a year earlier, bringing the full-year reading to a 1.2% drop. Malaysia’s first deflation since 1969 when the CPI fell 0.41%.

The declined in CPI last year was mainly led by the index’s transport segment amid lower fuel prices.

Meanwhile, Yeah pointed out that the recent spike in oil price is a reflection of improving oil demand globally coupled with major oil producers’ efforts to cut production to shore up prices that were battered down by a year-long pandemic fallout.

Oil prices have rallied over recent weeks as supplies tighten.

This is after production cuts from the Organisation of the Petroleum Exporting Countries (OPEC) and allied producers in the group OPEC+.

However, the US Energy Information Administration (EIA) in a report last week warned that the price of oil could fall back to US$50.3 later this year because of the rising production in the US.

Last month, the EIA expected Brent crude oil prices to average US$53 per barrel in 2021 and 2022 as it expected the crude oil production will increase in the second half of 2021 and in 2022.

According to the EIA, Brent crude will average US$56 per barrel in the first quarter this year, and US$52 a barrel over the remainder of 2021

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oil price , ringgit , Malaysian , economy , inflation , Yeah Kim Leng ,


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