All eyes on the oil price

PETALING JAYA: With the oil and gas (O&G) counters on Bursa Malaysia witnessing share price increases over the past week, in tandem with the elevated oil prices since the beginning of February, analysts are cautiously optimistic and bracing in hope that the commodity does not breach US$90 a barrel.

A host of local O&G players such as Dayang Enterprise Holdings Bhd, Petronas Dagangan Bhd, Petronas Chemicals Group Bhd and Bumi Armada Bhd have seen their stock rise, as the ongoing Middle East tensions is largely believed to have contributed to the price of Brent crude oil ballooning to over US$81 a barrel from about US$76.80 on Feb 2.

While it has edged lower in yesterday’s trading, Bloomberg reported that the Brent crude oil has rallied about 8% over the past fortnight as Qatar said negotiations aimed at securing an Israel-Hamas ceasefire and the release of hostages have not progressed as widely hoped.

Having said that, Rakuten Trade head of equity sales Vincent Lau believes the current level of oil prices is “a sweet spot” that could be beneficial for several parties, after acknowledging it is conducive for businesses in the O&G sector to a certain extent.

While the outlook of the local O&G industry is primarily dependent on the activities and capital expenditure of titan Petroliam Nasional Bhd (PETRONAS), he told StarBiz that the economy can still withstand the current oil price level.

“It could also benefit Malaysia as a net exporter of oil, especially in light of the currently weak ringgit,” he remarked.

Lau also does not foresee the price of Brent crude oil escalating beyond US$90 this year, as he is of the opinion that with inflationary pressures still bugging several major economies, an excessively high oil price is not sustainable.

As a background, the amping up of conflicts in the Middle East – a region that represents the source of a third of the world’s oil – is propping up prices.

Although the Presidents Day holiday in the United States will likely reduce trading on Monday, that could be partially offset by the reopening of Chinese markets after the week-long Lunar New Year festive period.

On the other hand, chief executive at the Center for Market Education (CME) Dr Carmelo Ferlito pointed out that oil prices are also prone to cyclical fluctuations, in addition to the geopolitical issues plaguing the Middle East.

As such, he told StarBiz that the US Producer Price Index (PPI) also warrants a close watch to anticipate further inflationary trends, which has stayed above 140 points since last year from below 120 points four years ago in 2020.

With the PPI being a family of indices that measures the average change over time in selling prices received by domestic producers of goods and services, it can indicate coming price inflation for consumers, as producers may pass these costs on to consumers through higher prices if they face elevated expenses and costs.

Ferlito believes that this persistent pressure is likely still a result of global monetary expansionary policies exercised by many nations over the past four years.

He added: “Furthermore, I see oil prices to be cyclically under pressure because of the discussions about an economy without fossil fuels because if oil is not going to be used in the future, it is better (for producers) to target higher prices now.”

Summarily, while he recognised the magnitude of the Middle East situation, there are also several factors which are at play in dictating the direction of oil prices.

Ferlito is expecting this cyclical behaviour of oil prices to persist this year, while posing a reminder that while Malaysia can benefit in terms of oil revenues when prices are high, the other side of the coin also sees the country facing higher petrol subsidy bills.

Meanwhile, CME Indonesia economist Alfi Syharin Ario Waskito believes that rising O&G prices will definitely benefit Malaysia’s financial situation in the short term, offsetting the country’s weak exports and the lacklustre level of the local note.

However, mirroring Lau’s comments, he said overheating prices in the long term can drive down consumer consumption due to inflation.

He added that rising transportation costs and travel sector growth in China has played a part in moving oil prices upwards.

On Bursa Malaysia yesterday, Dayang Enterprise gained five sen to close at RM2.17, PETRONAS Dagangan firmed 50 sen at RM22.80, while Bumi Armada edged up one sen to settle at 56 sen.

Hibiscus Petroleum Bhd added one sen to RM2.57 but Dialog Group Bhd closed one sen lower to RM1.86.

An O&G analyst with a local research house said that short-term movement of oil prices could remain range-bound, underscored by supply control by Organisation of the Petroleum Exporting Countries (Opec) nations and skirmishes in the Middle East.

“We think the outlook is stable for Malaysian O&G companies but again, it does not benefit many if oil prices soared beyond US$90 or even US$85 per barrel, especially in light of the US Federal Reserve’s recent comment that patience is still needed to battle inflation,” she said.

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