Low oil prices to remain, say experts

Oil markets tumbled more than 30% after the disintegration of the Opec+ alliance which triggered an all-out price war between Saudi Arabia and Russia. (Bernama pic)

PETALING JAYA: An analyst has warned that oil prices are expected to remain low in the wake of reports that oil markets have suffered their worst drop since the Gulf War.

However, Renato Lima De Olivera, a senior fellow at the Institute for Democracy and Economic Affairs, said this would also present a silver lining for several sectors.

He said the world would likely see low prices in the near future and that it might take some time for supply and demand to adjust again.

This is unless Russia and other Opec countries coordinate to reduce production, which would allow prices to recover.

According to Olivera, low oil prices reduce investments in exploration, and future capacity will eventually make prices go up again.

Olivera said as Malaysia’s economy depended significantly on the oil industry, a few sectors such as transportation and petrochemicals would “stand to win from a drastic fall in prices”.

Traditionally, he said, airline companies would benefit from a fall in oil prices since about 30% of their costs are directly linked to jet fuel.

“However, this time, this will not make much of a difference if the demand for flights, even at a cheaper price, is not there,” he told FMT, referring to the Covid-19 outbreak which has affected the travel industry.

He added that about 29% of all energy consumption is in the transportation sector and almost all of it – some 96% – comes from oil.

“Covid-19 represents a major shock to that source of demand and, now, the International Energy Agency is already predicting that the oil demand for 2020 will be lower than the previous year, a decline that has not happened since 2009.”

Olivera also said the low oil price would affect the oil and gas supply chain. The low oil prices, coupled with the Covid-19 outbreak, he said, would leave a negative fiscal impact.

The 2020 budget, he said, was designed with a forecast price of US$62 per barrel but on Monday the Brent price was in the US$30s.

“Therefore, a drop of US$30 would create a budget shortfall of about RM9 billion in one year. This is almost half the RM20 billion stimulus package recently launched.”

On Monday, Bloomberg reported that oil markets had tumbled more than 30% after the disintegration of the Opec+ alliance which triggered an all-out price war between Saudi Arabia and Russia.

Brent futures suffered the second-largest drop on record in the opening seconds of trading in Asia, behind only the plunge during the Gulf War in 1991.

Mohd Afzanizam Abdul Rashid, chief economist of Bank Islam Malaysia Bhd, said oil prices this Friday would likely be lower than the prevailing level.

But like Olivera, he too predicts that some will gain from this.

He said lower fuel prices could help improve purchasing power among Malaysians to some degree.

“We should expect a lower inflation rate in the near term. Lower inflation also means that Bank Negara Malaysia has more space to prescribe additional monetary easing, especially in the context heightened global uncertainties,” he said.

The Petroleum Dealers Association of Malaysia also expects oil prices to drop this Friday.

Its president, Khairul Annuar Abdul Aziz, said the price drop on Monday had caused its working capital to “take a big hit”, with an estimated loss of between 16 and 17 sen for every litre.

“Now we have two days left to sell at a normal margin, and if the price crashes, we again sell at a loss. So it will eat into our working capital,” he said when contacted, adding that petrol dealers were selling diesel and RON97 at a loss as their stock had yet to finish.

He voiced concerns that they would not be able to see off these two products by next Friday.

He expressed hope, however, that the lower price would translate into higher consumption by customers.

“Once it stabilises, we can start to recoup.”

He also urged the government to revert to the monthly fuel pricing instead of the weekly price system which is based on the automatic pricing mechanism formula.