Oil prices have declined from recent highs and are now trading at levels more reflective of the market’s fundamentals as fears over the US-Iran conflict subside. — AFP photo
KUALA LUMPUR: Oil prices have declined from recent highs and are now trading at levels more reflective of the market’s fundamentals as fears over the US-Iran conflict subside.
The global benchmark Brent crude ended last week down 45 cents at US$64.92 (RM4.07 per dollar) per barrel, while West Texas Intermediate crude oil fell 52 cents to settle at US$59.04.
Most analysts believe the easing of military tension between both countries provided relief not only to global equities but also oil-importing countries. FXTM market analyst Han Tan said higher oil prices could dampen the growth of economies that are net importers of oil, such as Indonesia and India.
“Demand for oil within net importer economies will probably wane as the commodity becomes more expensive, thus threatening a slowdown in economic activity.
“Then it can also lead to faster inflation. Consumption may moderate as the prices of goods and services climb,” he told Bernama.
In contrast, higher oil prices could be a boon for oil-producing economies like Malaysia, which produces about 661,000 barrels of oil per day, as the respective governments can generate more revenue from oil-related sources, Tan said.
National oil company Petronas reportedly enjoys RM300 million more for every US$1 increase in the oil price, but it would squeeze the government for a higher petrol subsidy.
Tan said a significant spike in oil prices could have a major impact on businesses and consumers as higher prices typically drive up transportation costs.
“The increase potentially feeds into headline inflation figures as well, but such a risk is mitigated in Malaysia by the pegged petrol prices,” he said.
Against this backdrop, credit must go to the government for ensuring that Malaysia has an economic contingency plan in place if the ongoing US-Iran conflict escalates.
Finance Minister Lim Guan Eng revealed the geopolitical conflict was discussed during the Cabinet meeting on Wednesday, with concerns more over the effect on global economic growth.
He quickly responded by giving guarantees that the government could definitely manage the petrol subsidy should prices spike.
Oil prices surged earlier last week, as the US-Iran conflict fed into fears that global oil supplies could be disrupted following the death of an Iranian military leader in a US airstrike on Jan 3.
The commodity’s prices are highly sensitive to sudden spikes in geopolitical tensions in the Middle East, which is home to many major oil-producing economies. The airstrike resulted in Brent oil price soaring to a high of US$70 per barrel on Monday. It rose to a four-month high of US$71.75 per barrel on Wednesday after Iran fired missiles on Jan 8 at two US military bases in Iraq in retaliation for the US attack.
Prices fell to US$65.22 per barrel later in the day after US President Donald Trump said that Iran “appeared to be standing down” in the Middle East.
“However, the risk of another sudden spike in geopolitical conflicts and the expected recovery in the global demand should keep oil prices relatively elevated in the rage of US$60-US$65 and above for the time being,” Tan explained.
Iran’s output was slightly above 3.8 million barrels per day in 2017.
Since US sanctions were imposed on the country in 2018, that figure has now dropped down to just over 2.1 million barrels in November 2019, Tan said, citing Organisation of the Petroleum Exporting Countries’ latest monthly report.
“Although total global oil consumption averaged about 99.8 million barrels per day in 2019, Iran’s ability to meet that demand has been significantly curtailed by the US sanctions,” he said.
MIDF Research analyst Noor Athila Mohd Razali opined that the current stand-off between the US and Iran will lead to a more sustainable oil price movement and stable outlook for the oil and gas industry.
“We reiterate our view that the situation is unlikely to escalate further at this juncture and we expect oil prices to trade between the US$60 and US$65 range and to average at US$65 per barrel in 2020,” she noted in a research note.
It is worth mentioning that the US-Iran crisis was not the only factor pushing up oil prices.
Statistics showed Brent futures have been on an upward trend since October 2019, as investors grew more hopeful that the rollback of tariffs from the US-China “phase one” trade deal could help global oil demand recover.
Then, in December 2019, the softer US dollar also allowed oil prices to climb further.
Since the Intercontinental Exchange launched the Brent futures contract in 1988, Brent futures have fallen to as low as US$9.55 per barrel in December 1998, and reached a high of US$147.50 per barrel in July 2008. — Bernama