Oil price up and it is good for Malaysia, say analysts

Analysts say this is generally good for nation but it can stoke inflation worries

PETALING JAYA: Crude oil hovered at a three-month high as the weaker US dollar made it cheaper to purchase the same quantity of fuel in other currencies.

Analysts believed a higher crude oil price was generally “good” for Petroliam Nasional Bhd (Petronas) and the country. As a net oil exporter, albeit a small one, the rise in prices will translate into higher earnings from sales overseas, which are under pressure from the ringgit’s 8.4% rise year-to-date.

But the Government also subsidised the bulk of the fuel sold in the domestic market.
Oil price chart by The Star

Analysts cautioned that a crude oil price surge to above US$100 a barrel like in 2008 would put a huge burden on federal expenditure and flare up inflation worries.

Crude oil hovered at above US$81 a barrel yesterday during Asian trading hours, near its highest since early May.

“It’s a sustainable move,” Peter McGuire, managing director at CWA Global Markets in Sydney, told Reuters yesterday. “We believe that the US dollar is heading lower, and the hurricane season is very worrying. I think you will see US$83 and US$85 very shortly.”

Crude oil for September delivery in New York was almost flat at US$81.23 a barrel at 5pm local time, Bloomberg data showed. Brent crude for delivery in September was little changed at US$80.78 a barrel in London.

The two most active crude oil futures contract jumped more than 3% on Monday after the US dollar fell to its lowest since April this year.

The US dollar, measured by an index that tracked the currency’s performance against its six major trading partners, dropped 8.6% over the past two months on growing belief that the US economic rebound was sagging.

Crude oil futures traded in New York jumped 13% over the same period.

“The weaker US dollar that we’re seeing is continuing to edge oil up right now,” Ong Yi Ling, an investment analyst with Phillip Capital in Singapore, told AFP yesterday.

Crude oil futures traded in New York, one of the more heavily-traded futures contracts, is usually favoured as a commodity hedge against the US dollar movement.

With appetite for risks on the mend, investors are pouring massive amount of cheap money into equities and commodities. Asia is the main beneficiary from this so called “flight to risk” because the region’s recovery is expected to be the strongest in the world.

A recent forex strategy report from Credit Suisse said the outlook for a return of US dollar-funded “carry trade” had become more compelling.

A weaker-than-expected US economy would keep borrowing cost at current near-zero rate longer, and the firm pushed its forecast for a first hike by the Federal Reserve to 2012 from its previous forecast at some time in the first quarter of 2011.

Meanwhile, a number of central banks in Asia, including Malaysia, had raised rates in recent months.

But, while the US economy is weak, it will continue to grow and not contract. This, the firm said, was crucial “for broad global activity and risk appetite.”

But this appetite for investment is pushing crude oil and other commodity prices higher and that has stoked inflation worries.

Two weeks ago, Malaysia raised prices of fuel sold at local pumps in a bid to cut down on its huge subsidy bill.

“In general, higher crude oil price is good for Petronas ... and the country. For crude oil, US$70-US$80 a barrel is a comfortable range,” said an analyst, who declined to be named, at a bank-backed brokerage.

Official government figures showed that liquidfied natual gas, crude petroleum and refined products generated a combined RM78.9bil in forex earnings in 2009, down by almost 30% from RM114.8bil recorded in 2008. The ringgit was almost flat last year, but the crude oil average price fell from US$98 per barrel in 2008 to US$62 in 2009.

The year-to-date average price stood at just below US$80 a barrel, boosted by rising demand in Asia.

Yesterday, a report showed crude oil demand from China - the world fastest growing big economy - was still rising, but at a slower pace.

Industry figures released yesterday showed China’s crude oil consumption in the third quarter might average 37 million tonnes a month, or about 8.9 million barrels a day, up 9.5% from the previous corresponding period. That compared with the 15% gain in the second quarter and the 22% increase in the first quarter, according to Bloomberg’s calculations derived from official figures.




By IZWAN IDRIS
izwan@thestar.com.my