Govt seen to benefit from sustained oil prices

Juwai IQI global chief economist Shan Saeed

PETALING JAYA: Despite the lingering global economic recessionary and geopolitical risks, global oil prices are expected to hold up this year, which will boost the government’s fiscal position as a net exporter of the commodity.

Economists and oil analysts are pegging the price of crude at US$80 (RM359) to US$100 (RM449) a barrel this year.

The international benchmark Brent crude oil prices averaged at US$101.32 (RM456) per barrel in 2022, compared with US$70.91 (RM319) in 2021.

As at press time, Brent crude futures was down 2.99% to US$72.47 (RM325) a barrel, dragged down by the banking sector crisis and a possible looming recession.

Juwai IQI global chief economist Shan Saeed told StarBiz that he expects major oil and gas producers in the Middle East and Asia to benefit substantially from strong global demand, rising output and high prices for their energy exports in 2023.

“The higher oil and gas prices are going to benefit the Malaysian government in terms of a stronger balance sheet, increased revenues, fiscal consolidation, and above all, giving space for infrastructure and development expenditures.

“With higher crude oil prices, it would support the government’s efforts in reducing the budget deficit and debt-to-gross domestic product (GDP) ratio,” he said, adding that oil prices are expected to remain elevated over the next six to 12 months.

The government is targeting the fiscal deficit to consolidate further in 2023 to 5% of GDP, falling to RM93.94bil from RM99.48bil in 2022.

It is noteworthy that the country’s revised Budget 2023 was based on an average crude oil price assumption of US$80 (RM359) a barrel.

Shan expects many oil and gas companies to make profits in 2023 onwards and substantial capital expenditure and production capacity to be enhanced.

This is going to contribute positively to the GDP growth and macro landscape of the country, he said. Similar other state-owned entities around the world could expect higher profits in 2023, 2024 and 2025, he noted.

National oil company Petroliam Nasional Bhd (PETRONAS) raked in record-breaking profits and a higher-than-expected dividend of RM50bil in 2022, but has warned about a potential “correction” in crude oil prices this year.

Juwai’s Shan is forecasting global oil prices at between US$83 (RM373) and US$127 (RM570) for this year, attributing partly to geopolitical risks and supply constraints.

HSBC chief economist for Australia, New Zealand and global commodities Paul BloxhamHSBC chief economist for Australia, New Zealand and global commodities Paul Bloxham

HSBC chief economist for Australia, New Zealand and global commodities Paul Bloxham described the commodity markets, including the oil market, as super-squeezed.

He said supply is constrained by action from Opec+ members, the impact of the Russia-Ukraine war and ongoing reduced investment in large-scale production capacity due to geopolitics as policymakers seek to achieve energy transition.

He foresees oil prices holding up well, and is forecasting the Brent oil price to average US$88 (RM395) a barrel in 2023.

“We see demand for oil holding up, as China’s reopening provides support, although a weaker global economy will likely limit significant oil price gains in 2023.

“The super-squeeze in commodity markets is set to keep global commodity prices at levels that are well above their historical averages, which is a positive for large commodity exporting nations.

“Less investment in global production of fossil fuels is set to see the prices of these products remain high, as they are more supply constrained,” Bloxham said.

Maybank Investment Bank regional co-head for oil and gas research, Liaw Thong Jung, who projects Brent crude at US$100 (RM449) per barrel, said demand for the commodity would be stronger this year, underpinned by China’s reopening and the world’s greater consumption post-Covid-19 pandemic.

Maybank Investment Bank regional co-head, oil and gas research Liaw Thong JungMaybank Investment Bank regional co-head, oil and gas research Liaw Thong Jung

At the same time, he said the supply was not picking up at the same pace due to the structural under-investment in the past and greater financing difficulty in an environmental, social and governance (ESG) concerned era.

“Financing is getting tougher because financial institutions are getting more reluctant to fund the oil and gas space due to ESG matters,” he said.

On the geopolitical side, he said the Ukraine-Russia conflict would continue to shape the direction of the global oil market.

Liaw estimates that an increase or decrease of US$10 (RM44.85) per barrel in the crude oil price would raise or cut the government’s total oil and gas-related revenue by around RM7bil – inclusive of PETRONAS’ dividend.

Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid anticipates Brent crude to hover around US$80 (RM359) per barrel, as global growth is expected to moderate to 2.9% in 2023 from 3.4% in 2022.

He said the production capacity was still low, judging from the number of global oil rigs in operation. The number of oil rigs globally stood at 1,921 units as of February 2023 from as high as 3,670 units in November 2014, according to Baker Hughes, which is one of the world’s largest oil field services companies.

There could be a possibility that crude oil prices would stay resilient, especially as China abandoned its zero-Covid policy late last year. This would mean demand for transportation from aviation industries could increase, he said.

Bank Muamalat Malaysia Bhd chief economist and social finance Mohd Afzanizam Abdul RashidBank Muamalat Malaysia Bhd chief economist and social finance Mohd Afzanizam Abdul Rashid

“Based on the latest forecast by the International Energy Agency or IEA, demand for crude oil would increase by two million barrels per day (mbpd) in 2023 to 101.9 mbpd, which was higher from the previous forecast of 1.9 mbpd. Combined with prospects of improving demand along with limited supply, crude oil prices could stay elevated,” Mohd Afzanizam noted.

He said the main headwind would be the state of the global economy. Any negative shocks to global growth would undermine the crude oil prices, he said.

On another note, Liaw expects the current blanket fuel subsidies to stay at least for this year. There are savings in fuel subsidy costs from the lower average crude oil price this year versus last year, he said.

In any case, he said the crude oil price was still elevated, which would result in another bumper financial year for PETRONAS to fiscally support fuel subsidies.

Shan said due to the global economic instability and financial fragilities, it was a pragmatic call to provide subsidies in order to shield the masses from inflation due to various exogenous factors.

Meanwhile, HSBC Asean economist Yun Liu said as one of the few net oil and gas exporters in Asia, Malaysia had benefitted from elevated global commodity prices despite some recent easing.

“On the fiscal side, generous subsidies were provided in 2022.

“Indeed, the government tapped a substantial amount of dividends from PETRONAS, with the revised 2023 budget still including a large contribution for 2023,” she said.

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