The noise of oil prices

OIL prices have become hostage to headlines. Traditionally driven by supply and demand fundamentals, oil markets today find themselves at the mercy of geopolitical developments.

One day, reports of renewed tensions in the Middle East send prices soaring. The next, signs of diplomatic progress erase much of those gains.

That is hardly surprising because the Middle East accounts for more than 30% of global crude oil production and holds nearly half of the world’s proven oil reserves.

But the push and pull is now leaving businesses, investors and policymakers trying to determine whether the recent easing in crude prices marks the beginning of stability – or merely the calm before another spike.

For context, Brent futures surged to US$119.50 a barrel on March 9 after war broke out in the Middle East, eventually reaching a year-to-date high of US$126.41 on April 30.

Prices later retreated following a preliminary peace deal, falling to US$70.14 on July 2 before renewed tensions briefly pushed Brent back above US$100 last week.

At the time of writing, Brent crude was trading at around US$89.75 per barrel.

Despite the pullback, not everyone believes the market is accurately pricing the risks that remain.

Supply risks remain underpriced

A local oil and gas (O&G) chief executive says prices are being held down by “artificial forces”, while another describes the market as “rigged”.

They argue that current oil prices fail to fully reflect persistent threats to global energy supplies, including continued tensions around the Strait of Hormuz, instability in the Red Sea and emerging concerns in the Caspian Sea.

“Oil prices are volatile at this point only because they are highly susceptible to news flow, swinging between US$5 and US$10 a day,” one executive says.

Another says the sharp price swings show how heavily the market is reacting to news flow despite underlying supply concerns.

Both executives also believe political considerations have helped keep oil prices in check.

One executive argues the Donald Trump administration has an interest in keeping oil prices low ahead of the US midterm elections in early November.

“After the midterm election, things might just change. That’s when the real scenario might become clearer,” he says.

The other executive adds that releases from strategic petroleum reserves had contributed to lower oil prices, although the market had yet to fully reflect the implications of those drawdowns.

“At the end of the day, all these countries will have to restock those reserves,” he says.

Demand weakness limits price upside

For SPI Asset Management managing partner Stephen Innes, the oil market is being pulled in opposite directions, with geopolitical and shipping risks supporting prices, while weaker Asian demand, demand destruction and rising non-Opec supply limit the upside.

Innes expects Brent to remain volatile in the months ahead, although he believes prices could gradually ease towards the low-US$80s a barrel.

“A sustained move above US$100 per barrel would likely require a prolonged disruption to the Strait of Hormuz, the Red Sea or regional production infrastructure,” he says.

Without such disruptions, Innes believes the recent rally will be difficult to sustain, although refined products such as diesel and jet fuel could remain relatively expensive due to constrained refinery capacity.

For Malaysia, the impact of high oil prices cuts both ways.

Innes says the country is relatively “well positioned compared with most Asian economies”, with higher energy prices supporting export earnings, government revenue, Petroliam Nasional Bhd (PETRONAS) and upstream O&G companies.

However, these benefits could be partly offset by higher fuel subsidies, transportation costs and broader inflationary pressures.

“Therefore, oil around US$80 to US$90 per barrel is broadly manageable and potentially mildly positive for Malaysia, but a prolonged period above US$100 would increasingly become a fiscal and inflation problem rather than an economic benefit,” Innes says.

Economist Yeah Kim Leng, meanwhile, says the recent easing in oil prices should help reduce inflationary pressures and remove a key risk to global growth.

He says this is particularly important for Malaysia as a highly open economy that relies heavily on external demand.

“As long as the global economy does not suffer from oil price shock, its ability to maintain a modest growth will be very favourable for Malaysia’s export sector.”

Yeah expects oil prices to ease towards US$70 to US$80 a barrel in the coming months, saying such levels would provide greater support for Malaysia’s growth and inflation outlook.

“If it is elevated, then it will have a stronger dampening effect on growth,” he adds.

At the corporate level, persistently high energy prices could also squeeze margins through higher production costs and weaker demand, he notes.

He says O&G players, however, would remain among the key beneficiaries of higher crude prices, with stronger prices also potentially encouraging investment in the sector.

Investment decisions take longer view

The outlook for upstream investment still remains a longer-term consideration.

One of the O&G executives says companies do not base investment decisions on short-term oil price movements, given the time needed for new projects to begin producing.

“If you make an investment decision today, you will probably get oil from that investment two to three years from now.”

Another executive, however, warns that major oil producers are opening up new frontiers to meet rising demand, which could eventually lead to excess supply and put downward pressure on prices.

“Not today, but in about two years down the line, you will see the oil price crashing because of the investments done today.”

For Malaysia’s O&G services and equipment players, the bigger issue may not be oil prices themselves.

The executive says activity is being held back by the ongoing reshuffling of offshore assets and projects, as the industry adjusts to changes in the ownership and structure of upstream assets.

This includes the establishment of Searah Malaysia Sdn Bhd, a 50:50 PETRONAS and Italy’s Eni SpA joint venture combining 19 O&G assets across Malaysia and Indonesia.

Separately, UK-based EnQuest plc has acquired stakes in four Malaysian offshore production sharing contracts from PETRONAS Carigali Sdn Bhd and E&P Malaysia Venture Sdn Bhd for up to US$833mil.

“The service companies want all this reorganisation to settle down and activity come back again. Because there’s so much indecision at the moment in Peninsular Malaysia, Sabah and Sarawak.”

Meanwhile, the executive says a local news report claiming that PETRONAS and Petroleum Sarawak Bhd have reached a resolution is a positive development that could help unlock more activity in Sarawak.

He says significant hydrocarbon resources discovered in recent years, particularly in Sarawak, have yet to be developed.

“If the resolution is real, then they can move forward and start working on these projects. You will see an increase in activity,” he says.

Public Investment Bank Research has maintained an “overweight” call on the O&G sector, despite acknowledging the continued volatility in crude prices.

“Prices are likely to remain volatile and headline-driven, with diplomatic efforts set against the risk of further escalation,” the research firm notes in a report. “Hence, our 2026 Brent assumption of US$83 per barrel carries materially higher upside risk.”

The research house continues to favour Hibiscus Petroleum Bhd, Malaysia’s sole listed pure-play upstream exploration and production company, given its direct correlation to higher realised oil prices.

A similar pattern is evident among major global oil companies, whose share prices have broadly tracked Brent crude futures. (see charts)