By Ranjit Singh
THE revival in global crude oil prices is good news for Malaysia as a net exporter of oil. Oil contributed around 20% of the government’s revenue in 2018 and the upward movement in oil prices would provide a cushion to its economy which has been adversely affected by the Covid-19 pandemic.
Bank Negara Malaysia (BNM) has projected that the gross domestic product (GDP) for 2020 would come in between -2% and 0.5%.
Sunway University professor Dr Yeah Kim Leng said that the increase in global oil prices would lift state oil company Petronas’ revenue and provide some respite to government coffers as income is projected to fall this year.
“The rising oil price is indicative of a global demand recovery led by China coupled with oil-producing countries’ production cutback as they grapple with excess inventories. The price uptick is positive for Malaysia as it will raise Petronas’ earnings, increase total export value and provide some relief to the decline in government revenue expected this year,” said Yeah.
Brent oil price slumped to its lowest level in 20 years on April 22 at US$15.98 per barrel. At the time of writing, it had snapped back by more than 100% to US$34.96.
AxiTrader’s chief strategist Stephen Innes told FocusM that the oil price upward movement still has more legs.
“The most significant surprising data point is the snapback in driving globally and auto sales in China. Whether that can be extrapolated to the US and elsewhere is another question, but consumers aren’t stupid and if they feel confident that they won’t catch the virus they will start driving more.
“But travel outside of drivable distances remains a mere fraction of what it was before, suggesting that the last piece of the puzzle will be aviation but that will likely be a long way off. I’m sticking to US$40 by the end of June and US$50 by year-end,” said Innes.
For the ringgit, the movements of crude oil prices are one important variable in the equation, as it has been historically proven that the ringgit is correlated to oil prices. The ringgit currently stands at RM4.36 to the US dollar.
It has been reported that for every US dollar increase in crude oil prices, the government would earn an additional RM300 mil in revenue.
Many Malaysian oil & gas (O&G) companies, big and small, have been struggling to keep afloat in this prolonged severe downturn of the past year as oil majors have halted many exploration and production (E&P) activities and slashed capital expenditures.
The steady recovery in crude oil prices recently is an indication that the worst is over for the O&G sector, although still far from its heyday.
Should crude prices continue to climb, this will be positive for local O&G companies. Stronger oil prices are likely to prompt oil majors to raise capital expenditure (capex). As a result, there will be more E&P activities which will, in turn, mean more jobs and contracts for local players. – May 20, 2020
