PETALING JAYA: Ship attacks are rising in the Straits of Hormuz, countries are scrambling to shore up oil supplies and several nations have rolled out work-from-home to save energy usage.
The Iran war, which extends to the Straits of Hormuz where roughly 20% of the world’s oil passes through, is wrecking the stability in oil prices everyone had hoped for.
Yesterday, Brent-grade oil price again briefly touched US$100 per barrel at press time as Tehran vowed not to allow “one litre” of Middle Eastern oil to reach the United States or its allies while attacks continue.
Costs are surging for consumers, especially in countries that are net energy importers.
Thailand, which Reuters said has only around 90 days of energy reserves left, told civil servants to take the stairs rather than the elevator to save costs.
In the case of Malaysia, its net energy exporter status provides a buffer but does not fully shelter it from the brunt of escalating costs.
For now, it appears that the situation in the Middle East is likely to get worse before it gets better.
BIMB Research director of research Mohd Redza Abdul Rahman warned oil prices could touch US$120 per barrel if the conflict continues for several weeks –assuming the worst-case scenario.
“In our view, reaching or exceeding the all-time high of US$147.50 in 2008 remains a low-probability ‘tail risk’ rather than a base case.
“This is because before the United States-Iran conflict, the market was heading toward a multi-million barrel surplus as production from non-Organisation of the Petroleum Exporting Countries countries (especially Brazil and Guyana) was robust, and global inventories were building,” he told StarBiz.
Economist Geoffrey Williams said that if the conflict ends and normal services are restored within 20 days, then the world can expect a short shock and short-term impact.
“In this scenario, I expect oil prices to be at US$90 to US$100 per barrel for the next two weeks and then to fall.
“I do not expect another hike like we saw on Monday but there is a risk of that.”
Explaining further, Williams said the International Energy Agency (IEA) has announced the release of 400 million barrels of oil, which is equivalent to four days of global demand.
Meanwhile, the Strait of Hormuz is blocked, cutting a flow of 20 million barrels per day.
“So, the IEA’s release would cover 20 days of that,” he said, adding that some of the biggest oil and gas facilities such as Ras Tanura and Ras Laffan in Saudi Arabia are currently restricted.
Williams noted that the government has assured that Malaysia has supply until May.
“But then we saw emergency changes in oil prices on Wednesday. This is clouding the picture for Malaysia and causing confusion.
“Malaysia should benefit from higher oil prices but this is not an immediate effect.
“I do not expect a significant rise in imported inflation and in fact the strong ringgit and subsidies on fuel and electricity help keep inflation under control,” he said.
CP Global Fintech Solutions chief investment officer William Yii said the IEA’s oil reserve release can probably cap near-term spikes but it won’t hold if the Straits of Hormuz’s closure drags beyond one month.
“The other real concern is that even a quick cease fire may continue to see elevated crude oil prices given the damaged infrastructure and heightened shipping risk that may linger for a while.
“For now, my base case is that as long as Iran continues to ‘control’ the Hormuz straits, Brent crude oil may stay elevated above US$80 not US$90.”
Once the war subsides, Yii believes that the long-term demand for crude oil remains as bleak as it has been since the dawn of China-driven electric vehicle (EV) evolution cycle.
He added that crude oil has been in a cyclical downtrend – if not a structural one – as China’s EV demand has structurally changed its marginal demand for crude oil.
With regard to market positioning, Yii urged investors to stay nimble and consider cash or money market funds as a form of asset allocation in times of uncertainty.
Meanwhile, stocks on Bursa Malaysia, like the rest of the world, have taken a beating as investors turned jittery.
That said, FBM KLCI has managed to linger around the 1,700-point level, although it is down from the one-year peak of 1,771.25 points on Jan 27.
“Most people have forgotten that cash is also an asset class during these uncertain moments.
“Otherwise, stay close to those companies with a solid and defensive business model and earnings profile, for the likes of the healthcare sector and trophy real estate investment trusts (REIT) such as the defensive mass market shopping malls in Malaysia.
“Lastly, focus on earnings yield in times of uncertainty,” according to Yii.
In times of uncertainties, funds would typically run towards safe havens.
However, BIMB Research’s Mohd Redza does not anticipate the current market volatility to result in a mass exit of foreign funds from Malaysia.
In fact, he said Malaysia’s energy-linked economy captures upside from energy price movements as well as the defensive nature of sectors such as banks, utilities and telecommunications, which can partially cushion the economy against broader macroeconomic pressures.
Mohd Redza recommends a “flight to quality” strategy for investors, rather than moving to the sidelines.
The objective is to prioritise companies with domestic energy insulation and integrated supply chains, he said.
Some of such sectors are oil and gas, consumer staples, banking, utilities, healthcare, REITs and telecommunications.
In a note yesterday, MBSB Research said that should crude oil prices remain within the US$90 to US$100 range, upstream oil and gas activity could gradually increase.
This would benefit service providers such as Malaysia Marine and Heavy Engineering Holdings Bhd
, Deleum Bhd and Bumi Armada Bhd, which MBSB Research said are well positioned to capture increased demand for offshore engineering, maintenance, and production support services.
“While the broader conflict appears to remain contained for now, the damage to key facilities and logistical networks may tighten near-term supply conditions.
“In such an environment, sustained crude oil prices within the US$90 to US$100 per barrel range would likely incentivise major oil producers to accelerate investment and development activities to compensate for the shortfall created by the disruption,” added MBSB Research.
Against the highly volatile developments in the oil market, market players continue to maintain a close watch on the ringgit’s performance.
In the past two weeks amid the Middle East tensions, the ringgit has declined slightly against the US dollar, down from the RM3.88 to RM3.89 range to RM3.93 currently.
Williams said the ringgit is showing “some resilience” around RM3.90 to the greenback, although he warned that there remains a risk of a “sharp correction” to a more normal range of RM4.20 to RM4.40.
Meanwhile, in an earlier note on March 6, Kenanga Research said that the ringgit no longer behaves as a traditional oil proxy and instead trades more like a high beta emerging market currency.
This indicates that the rise in oil prices may not have substantial positive impact on the ringgit like it used to have.
“Until investors gain clearer visibility on the conflict’s duration, the US dollar should remain supported, keeping the ringgit pressured around RM3.94 to RM3.98,” said Kenanga Research.
