‘MILDY POSITIVE FOR MALAYSIA’
Any surge in oil price can improve country’s trade balance via LNG exports, says analyst
THE rising tensions in the Middle East are posing a significant threat to economies in Asia Pacific, with the main worry being crude oil price hikes, warns Moody’s Analytics.
The timing of the rise in oil price was especially detrimental to the regional economies, it added.
Moody’s Analytics pointed out that even for the region’s net oil exporters, the situation did not necessarily translate into net gains.
However, local economists believed that the oil price spike could, in fact, be mildly positive for Malaysia.
“Malaysia will be among the least affected countries in Southeast Asia, mostly due to the huge domestic oil and gas industry and minor reliance on energy imports,” said Tradeview Capital fund manager Neoh Jia Man.
“While Malaysia is a small net oil importer, its LNG (liquefied natural gas) exports were significant at close to RM60 billion last year.
“Given that most LNG contracts are indexed to the oil price, any surge in oil price could improve the country’s trade balance.”
Neoh said the rising geopolitical risks resulting from the escalation of tensions in the Middle East had been reflected in the current oil price.
“Should Israel choose not to retaliate significantly against Iran’s strike, we do not foresee global oil price moving to a significantly higher equilibrium,” he added.
On Friday, ahead of Iran’s attack on Israel, West Texas Intermediate (WTI) crude was trading at between US$85 and US$90 per barrel; of that, an estimated US$5 was a risk premium in anticipation of the attack.
Following the attack, Moody Analytics now expects another US$5 per barrel increase to the risk premium, pushing WTI to the US$90 to US$95 range.
“From here, there are two possible scenarios. The most likely is a measured and restrained response from Israel that de-escalates tensions, in line with pressure from the Biden administration in the United States and the wider global community. That would see the US$10 per barrel risk premium fade over the next few weeks.
“The second and far more damaging scenario would see an escalation of the conflict as Israel forcefully responds to the attack. Were that to occur, oil price could jump to more than US$100 per barrel,” said Moody’s Analytics.
Malaysian Institute of Economic Research economist Dr Shankaran Nambiar said the Israel-Palestine conflict had not affected supply dynamics and, thus, did not affect the oil price.
“But retaliation by Israel against Iran would see the oil price rising to US$100 due to increased uncertainties.
“China’s growth could also be impacted as the country was reliant on Iranian oil,” Shankaran added.
Malaysia University of Science and Technology economist Prof Geoffrey Williams said any escalation of the conflict could increase market risk and push investors to seek safe havens.
“But Bank Negara Malaysia has issued a statement saying it will monitor the situation and adjust policy as necessary and this should reassure markets. It is a good intervention,” he said.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the ringgit was likely to remain weak in the near term.
“Our import bills will likely remain high, and this can have an impact on the cost of living,” he said.