AS global oil prices as measured by Brent Crude has tested the US$70/barrel mark for the first time in almost a year after crashing below US$20/barrel last April, adherence to the retail fuel price ceiling can be negative for Malaysia’s fiscal position.
On Feb 10, Finance Minister Tengku Datuk Seri Zafrul Aziz announced the revision of ceiling price for RON 95 petrol and Euro 2M diesel with immediate effect, lowering them by 3 sen to RM2.05/litre and RM2.15/litre.
“At the current Brent oil price of US$70/barrel and exchange rate of RM4.05/US$, we approximate market prices for RON95 and diesel at RM2.33 and RM2.37 per litre respectively, implying subsidy rates of 22-28 sen per litre at current retail fuel prices,” projected CGS-CIMB research head Ivy Ng Lee Fang.
“Assuming the annual consumption of subsidised RON95 and diesel at 26.4 billion litres in 2021 (or 5% below 2019’s level of 27.8 billion litres to account for movement controls), the cost of unbudgeted fuel subsidies to the government could reach RM7 bil if prices remain at these levels for the rest of the year.”
On the other hand, assuming fiscal revenue to oil price sensitivity of RM3 bil per US$10/barrel, the research house expects the Government to collect RM8.4 bil in additional oil-related fiscal revenue relative to the forecast made in Budget 2021 which factored in an average oil price of US$42/barrel.
As for other winners and losers, CGS-CIMB Research noted that historically, there is a positive correlation between the FBM KLCI and Brent crude oil prices which could be due partly to the fact that Malaysia is a net oil and gas exporter and that during periods of high crude oil prices, the ringgit typically strengthens.
“The converse is also true,” observed the research house. “Big-cap companies that are beneficiaries of higher crude oil prices under our coverage with “add” calls are Petronas Chemicals Group Bhd (higher petrochemical prices) and Petronas Dagangan Bhd (inventory gains).”
Other potential indirect beneficiaries are oil & gas names (Sapura Energy Bhd, Bumi Armada Bhd, Velesto Energy Bhd, Yinson Holdings Bhd and Dialog Group Bhd) and palm oil players (IOI Corp Bhd, Kuala Lumpur Kepong Bhd, Hap Seng Plantations Holdings Bhd, Ta Ann Holdings Bhd and Genting Plantations Bhd) due to improved economic viability for biodiesel which could potentially lead the Indonesian Government to lower export levies.
“The higher crude oil price is a potential positive for airlines in the near term as it lowers their potential fuel derivative losses,” opined the research house.
“However, higher oil prices could be negative for the shipping, manufacturing, auto and consumer sectors due to higher transport and fuel costs.” – March 9, 2021
