PETALING JAYA: Crude oil prices have climbed to their highest level since early June, overturning expectations that they would ease in the second half of the year (2H26) and reviving fears that escalating tensions in the Middle East could derail global economic growth.
The escalation, de-escalation and re-escalation phases of the Iran war has made crude oil prices volatile.
At last look, the Brent crude futures contract was trading at around US$95 a barrel, up 4% for the day, following renewed attacks heightened concerns over disruptions to oil supplies from the region.
This marked a sharp reversal from July 2, when Brent hit US$70.14 a barrel, its lowest level since the conflict began on Feb 28, as traders priced in a de-escalation.
Re-escalation of hostilities has seen a repricing of a war premium into prices.
While Malaysia is better prepared now, economists warned that a sustained period of elevated crude prices would still raise business input costs, fuel inflation, weigh on consumer spending and eventually put a drag on economic growth.
Economist Yeah Kim Leng said markets had expected oil prices to moderate in 2H26 on the assumption tensions between the United States and Iran would ease.
“Now that the conflict has re-escalated, the spectre of an energy crisis has resurfaced. That is the key risk facing the global economy now,” Yeah told StarBiz.
“The possibility of depression or recession cannot be ruled out.”
His concerns are echoed by BMI, a Fitch Solutions company, which estimated a 25% probability that re-escalation of the Iran conflict could push the global economy into a technical recession.
BMI said major disruptions to shipping through the Strait of Hormuz and attacks on energy infrastructure across the Middle East could send Brent crude back above US$100 a barrel while dragging global growth below 2%, a level typically associated with a technical global recession.
“Our modelling suggests this scenario would add 1 to 1.5 percentage points to global inflation and reduce global growth by 0.3 to 0.5 percentage point this year to close to, or below, 2%,” it wrote in a research note yesterday.
BMI, nevertheless, sees a 55% chance that a preliminary agreement to resume shipping through the strait will be reached by the end of the third quarter, allowing crude oil prices to ease in the fourth quarter and early 2027.
It also assigns a 20% probability that hostilities drag on beyond the third quarter, thus keeping the Brent contract above US$90 a barrel on average this year while further lifting inflation and slowing global growth.
Yeah added a prolonged conflict, particularly one involving disruptions to Gulf energy infrastructure or shipping routes, could push oil prices well above current levels.
“If there’s no deal reached soon, we may face renewed concerns about high oil prices. Oil prices could shoot above US$100 a barrel.”
Yeah noted some analysts have projected prices could exceed US$150 a barrel under a worst-case scenario if the destruction of energy infrastructure were to worsen.
The resulting supply shortages would have severe consequences for the global economy, he said, with Malaysia unlikely to be spared despite efforts to diversify its energy supply sources.
Yeah, however, believes the country is better positioned to manage the impact of higher oil price despite being exposed to global energy markets.
He said the government and industries have been coordinating since April to reduce dependence on Middle Eastern supplies by securing alternative sources from countries such as Russia, Uzbekistan and Kazakhstan.
“Malaysia will be in a better position to cope, but nevertheless, it will be severely impacted.”
The government had in April established the Crisis Management Task Force under the National Economic Action Council to monitor the economic fallout from the conflict and surging global oil prices.
Chaired by Tan Sri Mohd Hassan Marican, the task force oversees not only fuel supplies but also broader supply chain risks involving logistics, petrochemicals, plastics and fertilisers.
Yeah warned prolonged high oil prices would raise input costs across most industries given the economy’s reliance on petroleum-based products and petrochemicals.
The higher costs could eventually be passed on to consumers, while weaker demand and production disruptions could weigh on company earnings, he added.
“Corporate earnings will be impacted either by demand contraction due to overly high prices or because companies do not have adequate raw material supplies to maintain production.”
He added inflation, which stood at 2% in May, would become a growing concern should oil prices remain elevated.
At above US$100 a barrel, Yeah warned the government would have limited room to absorb the shock through subsidies without worsening its fiscal position.
“Under a prolonged high oil price scenario, we have to rebalance between an overly high fiscal deficit versus inflation and the knock-on effects on industries,” he said.
“There has to be some adjustment so that the fiscal position does not deteriorate to the extent that it affects the rest of the economy as well as investor confidence.”
Bank Muamalat Malaysia Bhd’s chief economist Mohd Afzanizam Abdul Rashid said recent subsidy reforms had strengthened Malaysia’s ability to withstand global oil price volatility.
He said the targeted fuel subsidy mechanism has reduced leakages and improved the distribution of assistance, allowing households and eligible businesses to be partially shielded from rising fuel prices.
Despite that, he cautioned inflationary pressures would still emerge as businesses that do not qualify for subsidies pass higher operating costs on to consumers.
“There could be a chance general prices could be higher as some businesses might want to pass on the additional cost to the consumers,” he noted.
Afzanizam said many companies have already incorporated higher fuel costs into their contingency planning and are increasingly relying on technology and operational efficiencies to manage rising expenses.
“With the right strategy, businesses could stay resilient with assistance from the government and its agencies.”
Another chief economist at a local bank said companies have responded to the uncertainty but few are truly prepared for a prolonged period of elevated oil prices.
“Are companies prepared? No. Are they doing something? Yes,” he told StarBiz.
He said some companies have already begun slowing expansion plans in anticipation of higher costs during 2H26.
Asked whether higher oil prices would materially weigh on corporate earnings or alter the broader economic growth outlook, he said the impact would likely be “a slow burn rather than a cliff”.
He said consumers could begin feeling the effects of higher prices within the next three months as businesses pass on rising costs.
The economist added many global economic forecasts had been based on expectations that oil prices would moderate later this year, meaning prolonged elevated prices could force growth projections to be revised.
While Malaysia should be able to weather the initial impact better than many economies, he warned that persistently high oil prices would eventually test the country’s resilience.
“To a certain extent, Malaysia would ride this well. But something is bound to break if oil were to trend above US$90 consistently or for far too long.”
He noted in such a scenario, it would likely place increasing pressure on the government’s finances, particularly if the subsidies bill continues to rise.
