A perfect storm driving energy prices


“There is rising concern among policy makers, analysts and economists that the higher fuel prices arising from a combination of inadequate production, supply disruptions and a global demand surge, will derail the projected global growth trajectory in 2022,” says Sunway University economics professor Dr Yeah Kim Leng.(file pic)

ENERGY prices in the form of oil, gas, and coal are escalating to their highest in seven years, and economies around the world are feeling the pinch.

The international benchmark Brent crude oil price is up more than 60% to US$85 (RM353) per barrel, while the price of natural gas has doubled.

Some quarters are expecting the crude oil price to touch US$100 (RM416) per barrel in the coming months as the winter season approaches.

Last month, Goldman Sachs raised its forecast for year-end Brent crude oil prices to US$90 (RM375) per barrel from US$80 (RM333), due to a faster fuel demand recovery. Goldman Sachs also said the current global oil supply-demand deficit is larger than it had initially expected.

Historically, energy prices have tended to have a temporary spike during the winter months due to higher consumption for heating systems.

But this time around, energy prices are also being driven by the rebound in economic activity from the Covid-19 pandemic as more economies are opening up with many companies scrambling to ramp up their production.

AllianceDBS Research chief economist Manokaran Mottain says rising crude oil price bodes well for the government’s coffer as it has always been used as an important benchmark in its annual budget expenditure.AllianceDBS Research chief economist Manokaran Mottain says rising crude oil price bodes well for the government’s coffer as it has always been used as an important benchmark in its annual budget expenditure.

The perfect storm of higher energy prices and a supply shortage as oil producers kept their production tight, raises the question if it could slow down economic recovery.

Economists and analysts expect energy prices to sustain for the rest of 2021 and hence pose threats to economic recovery.

“There is rising concern among policy makers, analysts and economists that the higher fuel prices arising from a combination of inadequate production, supply disruptions and a global demand surge, will derail the projected global growth trajectory in 2022,” says Sunway University economics professor Dr Yeah Kim Leng.

“If the energy price level remains high through 2022, global growth will likely be dampened and import-dependent economies are expected to be more adversely affected.

“A faster deceleration of the global economy will likely ensue as the higher energy prices will have a knock-on effect on the prices of most goods and services, including transport, travel and logistic services,” he adds.

The International Monetary Fund has cut its global growth for this year to 5.9% from 6% earlier and maintained its 4.9% growth forecast for 2022, Yeah points out.

In Malaysia, however, consumers are yet to feel the inflationary pinch from oil prices as the government subsidises the RON95 fuel.

Boon for Malaysia

As an oil and gas (O&G) producer and exporter, the surge in energy prices is a boon for Malaysia’s revenue and the ringgit.

This has also raised interest in the local oil and gas stocks, as evidenced by the increase in Bursa Malaysia’s energy index, and transportation and logistics index.

As of yesterday, the energy index had rose more than 20%, while the transportation and logistics index surged more than 17% year-to-date.

Meanwhile, the benchmark FBM KLCI rebounded to a month’s high as foreign funds continued to buy local stocks.

AllianceDBS Research chief economist Manokaran Mottain says rising crude oil price bodes well for the government’s coffer as it has always been used as an important benchmark in its annual budget expenditure.

He says the Ministry of Finance (MoF) had estimated petroleum-related revenue to come in at RM37.8bil based on a Brent crude oil price assumption of US$42 (RM175) per barrel during Budget 2021 which was passed last year.

“At the current price, the government’s revenue could double. But at the same time their subsidy payout will be higher due to the blanket subsidy for RON95,” he says.

CGS-CIMB has estimated an additional government revenue of RM430mil for every US$1 (RM4.16) per barrel increase in the crude oil price after adjusting for a weaker ringgit against the US dollar. This is higher than the official guidance of RM300mil.

However, the research house notes that the government would start incurring fuel subsidies when the oil price hits US$60 (RM250) per barrel, with additional fuel subsidies estimated at RM650mil per US$1 (RM4.16) per barrel crude oil price hike.

The government will be tabling Budget 2022 on Oct 29. Malaysia is also set to raise the government’s statutory debt ceiling to 65% of gross domestic product (GDP), as part of measures to deal with the economic fallout from the Covid-19 pandemic.

Yeah says a higher petroleum revenue will ease thw pressure on the government to look for other revenue sources to fund the budget which is expected to remain expansionary.

“With stronger growth expected in 2022 that will result in higher revenue collection, the government will be able to achieve a smaller budget fiscal deficit while ensuring adequate allocations for the various public health and welfare programmes for the poor,” he says.

Meanwhile, Manokaran points out that the immediate impact of higher energy prices is inflationary pressure, but that this is unlikely to curb economic recovery.

“This is due to the low base effect, everything was at a standstill during the movement control order. The demand for energy will continue to increase and we expect that oil could reach US$100 (RM416)per barrel early next year,” Manokaran adds.

MIDF Research has changed its Brent crude oil forecast this year to average at US$72 (RM299) per barrel in 2021, and US$80 (RM332) per barrel in 2022, from US$62 (RM258) in 2021 and US$68 (RM283) in 2022.

The research house explains that the previous forecast was on the basis that demand recovery from the pandemic’s socio-economic impact would prompt the Organisation of the Petroleum Exporting Countries (Opec) to increase its supply output above the current 400,000 barrels per day to cater to the demand.“However, the latest discussion within Opec had indicated that the supply output will continue as is, despite the continuously growing demand; driving crude oil prices even further,” MIDF tells StarBizWeek via email.

“The sentiment that crude could rise up to US$100 (RM416) per barrel is mainly due to the anticipation of a cold winter. Natural gas and coal prices had been spiking as well, causing the utilities sector to switch to fuel oil to sustain heat and power generation, adding to the demand for crude in winter,” MIDF says.

It reckons the rising energy prices would benefit the local O&G players that will see increased utilisation of refinery plants and offshore vessels, and demand for construction, maintenance and repairs on offshore equipment and facilities.

“Contracts in the construction, maintenance and repair services for the sector will be more promising, not only due to the exploration and production activities picking up as the pandemic is better managed, but also to cater for energy transition,” MIDF says.

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