Stronger demand to spur oil prices

“Higher oil prices would provide a boost to the balance sheet of the government and consolidate the fiscal side further by providing impetus for the government to spend more.” - Shan Saeed

PETALING JAYA: Geo political risk, economic recovery and supply constraints are likely to fuel higher crude oil prices this year which will be a boon to the country’s fiscal position amid inflationary pressure.

Juwai IQI global chief economist Shan Saeed told StarBiz he expects higher global oil prices in 2022. He attributed this to geo political risk, depreciation of the United States dollar against a basket of currencies and stronger demand for the commodity.

He said the oil market is moving into a backwardation phase where the spot price is higher than the future crude price.

“Tensions on the Ukraine conflict between US president Joe Biden and his counterpart Russian President Vladimir remains and talks between the two leaders have not resulted in any positive outcome.

“Ukraine is the crucial key supply route for oil and gas to Europe as the latter gets 45%-50% of the commodity from Russia. If Ukraine gets disrupted, it will impact oil supplies to Europe.

“Furthermore, a break-down in the Opec+ agreement or any potential new price war - triggered by an unexpected surge in US supply, tensions in Baltic or Middle East or even an Iran nuclear deal - will be a big blow to the otherwise bullish energy market” he noted.

Shan is projecting oil prices to hover around US$77 (RM324) to US$107 (RM450) a barrel for this year. However, he said subject to the circumstances, there could be a repeat of the 2008 oil price which rose up to US$147.11 (RM619) that year.

At press time Brent crude, the international benchmark, was trading at US$82.74 (RM348) a barrel.

On the domestic front, he added that higher oil prices would provide a boost to the balance sheet of the government and consolidate the fiscal side further by providing impetus for the government to spend more.

“Spending on infrastructure and developmental projects is going to bolster the gross domestic product (GDP) equation at the macro level,” he noted.

Fiscal deficit to GDP is estimated to narrow to 6% in 2022 from 6.5% in 2021.

On the risk of inflationary pressure, Shan said higher oil prices would create inflation globally, adding that however, Bank Negara has the monetary policy lever to curb inflation by raising the overnight policy rate (OPR) and appreciating the ringgit.

Renato Lima-de-Oliveira, an assistant professor of business and society at Asia School of Business and a fellow of the Centre for Market Education, said he doesn’t foresee a risk yet of energy prices reaching a level in the country that would add to inflationary concerns.

However, he said higher oil prices would benefit Malaysia directly via higher tax collected from the oil and gas (O&G) sector as well as aid Petronas to generate higher dividends.

“Furthermore, if oil prices continue to be attractive, they increase the appetite of investors to start new exploration projects in the country, which is critical to find and develop new reserves and for jobs generation along the supply chain,” he said.

On the outlook of crude oil in 2022, he said 2021 was a year of a healthy recovery, with demand ramping up to levels closer to pre-pandemic activity, which was about 100 million barrels per day (mb/d) as at end 2019.

For 2022, Renato said it is likely that the oil market recovery would continue, albeit at a slower pace than previously thought. The optimistic scenario for the O&G sector is to see a return to 100 mb/d, but continued limitations in mobility due to the Omicron variant could dampen this forecast slightly.

Commenting on the challenges that would affect the oil market for this year, he said. Firstly, the global oil industry is under invested in new supply capacity in the last few years and that has resulted in tight markets in the event if economic activity picks up fast again.

For instance, he said the investment worldwide in 2019 was US$475bil (RM2 trillion) in O&G exploration and production, but it was only US$326bil (RM1.4 trillion) in 2020 and US$351bil (RM1.5 trillion) in 2021.

Secondly, the shift towards green energy and environmental, social and governance (ESG) has further reduced the appetite for investments in dirty assets like new O&G projects, he noted.

“There is a short-term risk of a mismatch between the energy supply that we want, which is greener, and the one that we need to power our existing assets, which are mostly based on fossil fuels.

“Lastly, we still don’t know what will be the economic growth in 2022 since we are seeing again what seemed to be things of the past, like travel restrictions and lockdowns. Will Omicron be the last variant of concern or are we going to see a new one which is just as contagious but more lethal?,” he asked.

Meanwhile, OCBC Bank economist Howie Lee said continued economic recovery and constricted supply are likely to continue fuelling crude oil higher in 2022.

Consumption growth is likely to come from Asia next year with many Asian countries not having fully reopened their economy post-Covid-19, he said.

“The increase in oil demand from multiple Asian countries at around the same time, in addition to supply uncertainty from the US and Opec+, could see Brent crude test US$100 (RM421) per barrel for the first time since the shale boom.