Limited impact on oil prices for now

CGS-CIMB Research said Opec would “take additional measures” to “support market stability” if needed following the conflict in the Middle East.

PETALING JAYA: The Gaza-based Hamas and Israel conflict that began on Oct 7 should have a limited effect on the disruption of global oil supplies for now, according to CGS-CIMB Research.

The research house said Brent crude futures peaked at just US$88 per barrel on Oct 9, which is lower than the average price of US$92 per barrel for last month.

Saudi Arabia has also announced that it would continue its voluntary one million barrels per day (mbpd) oil production cut into December 2023, with Russia also retaining its crude exports cuts of 0.3 mbpd also into the final month of the year.

Oil prices appeaed to be bounded by “higher for longer” US interest rates, according to the research house, although in the worst-case scenario, the ongoing conflict may encourage Lebanese group Hezbollah to enter the war, which may compel Israel to strike Iran, since the latter is backing both Hamas and Hezbollah.

CGS-CIMB Research said: “Reuters reported that the United States and Israel have not found any evidence that Iran actively participated in the Hamas attack apart from providing moral support.

“Any conflict with Hezbollah has so far been limited and therefore, a widening of the conflict is not our base case market expectation.”

The research house pointed out that on Tuesday, the Organisation of the Petroleum Exporting Countries and allies (Opec+) would “take additional measures” to “support market stability” if needed following the conflict in the Middle East.

CGS-CIMB Reseach said the statement implied that ongoing production cuts by major producers such as Saudi Arabia may be scaled back ahead of schedule, should the conflict widen to encompass Iran.

“Israel produces almost no crude oil or condensate, and its gas exports of 9.2 billion cubic metres (bcm) in 2022 only made up 0.9% of the global gas trade of 1,022 bcm, according to oil major BP plc and data provider Standard & Poor’s.

“In summary, the Hamas-Israel conflict, as it stands today, may be insufficient to support a major rally in oil prices,” it added.

Having discounted a significant oil price increase, the research unit said the direct beneficiaries of any oil price rally would include Hibiscus Petroleum Bhd and Dialog Group Bhd.

CGS-CIMB Research is estimating that every US$1 per barrel increase in the crude oil selling price may increase its forecast for Dialog’s core net profit for the financial year ending June 2024 by 1% and the indirect beneficiaries would include service companies such as Velesto Energy Bhd which operates jack-up drilling rigs, and Dayang Enterprise Holdings Bhd which has exposure to offshore maintenance and offshore support vessels.

Meanwhile, it said floating production storage and offloading (FPSO) companies like Yinson Holdings Bhd and Bumi Armada Bhd are unlikely to see incremental contribution to their earnings in the near-term given the fixed-rate nature of FPSO charters, but could benefit in the long-term from increased capital expenditure by upstream companies.

Petronas Chemicals Group Bhd is also a beneficiary of higher oil prices, as its Kertih complex that enjoys fixed feedstock prices may gain from higher selling prices of its polymer output.

“However, the picture is muddied once its naphtha-based Pengerang units begin commercial operations as naphtha-based petrochemical companies are making cash losses currently,” the research outfit projected.

On the perspective of the targeted fuel subsidy initiative, CGS-CIMB Research said Petronas Dagangan Bhd could see lower sales volumes if the government reduced the availability of petrol and diesel subsidies next year, which would likely expose consumers to the high prices for transportation fuels.

An economist of a local research house echoed CGS-CIMB Research’s view, telling StarBiz that it might still be too soon to impute any of the Israeli-Palestinian conflict into the global oil price movement until a clearer picture emerges, most likely by the end of October, especially since Opec+ has voiced out on the matter.

“If Opec+ has stepped in and committed to market stabilisation, at least that is a good sign as far as worldwide or local inflation is concerned,” he said.

The economist highlighted that the more immediate factor likely to influence inflation in Malaysia is the tabling of Budget 2024 tomorrow.

Head of research of Maybank Securities Thilan Wickramasinghe said oil prices could elevate on the current tension in the Middle East, which would increase safe haven flows to the US dollar, creating inflationary pressures for Singapore.

“In terms of impact, we think that higher energy costs could lead to immediate increases to operating costs for sectors such as transportation and utilities.

“Sectors dependent on commodity inputs, for example, food and beverage, as well as agricultural stocks, could feel secondary impacts due to higher fertiliser costs and increases in other raw material expenses,” he said.

He said higher costs could drive momentum for companies and countries building energy independence and diversifying risks, and could also be supportive of the offshore and marine as well as oil and gas sectors besides companies developing alternative energy strategies.

“We think the banking sector could feel the impact from an asset quality perspective with tighter operating margins and higher interest costs,” he said.

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