Opec deal seen as pos­i­tive for ring­git

> How­ever, cur­rency con­tin­ued its down­ward trend against US dol­lar yes­ter­day, al­beit slightly

The Sun (Malaysia) - - SPEAK UP -

PE­TAL­ING JAYA: With the Or­gan­i­sa­tion of Petroleum Ex­port­ing Coun­tries (Opec) mem­bers fi­nally agree­ing to cut oil production by 1.2 mil­lion bar­rels per day, the ring­git, which has yet to see any signs of re­bound, could be sup­ported in the near term, ac­cord­ing to an­a­lysts.

The ring­git weak­ened marginally by 0.01% to 4.4668 against the US dol­lar yes­ter­day, fast ap­proach­ing the 4.50 level.

Oil prices were up about 3% yes­ter­day af­ter­noon after soar­ing al­most 10% on Wed­nes­day. At around 1430 GMT, Brent crude was US$1.40 higher at US$53.24 a bar­rel. US crude was up US$1.34 at US$50.78 a bar­rel

“We would ex­pect the rise in crude oil price to lend sup­port for the ring­git in the im­me­di­ate term,” MIDF Re­search said in its re­search note yes­ter­day.

Opec mem­bers agreed to cut production by 1.2 mil­lion bar­rels per day at the group’s meet­ing in Vi­enna, which should re­duce Opec’s production to 32.5 mil­lion bar­rels per day (bpd).

Iran, Libya and Nige­ria were ex­empted, with Iran be­ing al­lowed to freeze rather than cut while Libya and Nige­ria may con­tinue to in­crease due to their drop in sup­ply be­cause of in­ter­nal con­flicts.

At the same time, In­done­sia is sus­pended from Opec mem­ber­ship as it ex­pressed dif­fi­culty in join­ing the production cut. As a net im­porter of oil, it would have pre­ferred the price to re­main low rather than high.

MIDF Re­search said, ce­teris paribus, the to­tal cut from both Opec and nonOpec mem­bers to be about 1.8 mil­lion bpd, which will lead to an oil deficit of around 1 mil­lion to 1.5 mil­lion bpd.

While such a cut could re­ally boost the oil price, MIDF Re­search said, two hur­dles re­main.

“Firstly, it is ques­tion­able whether both Opec and non-Opec mem­bers in­volved in the agree­ment will ac­tu­ally fol­low through with their own production cap and, even if they do, un­til when.

“Sec­ondly, it is likely that the slow­down in production by non-Opec mem­bers (which are not di­rectly in­volved in the deal) will ex­pe­ri­ence a re­ver­sal, par­tic­u­larly by the US shale pro­duc­ers,” it ex­plained.

MIDF Re­search said Opec it­self only ac­counts for around 35% of world oil production, and it cau­tioned that US production alone could pump an ad­di­tional 500,000 bpd in a short pe­riod of time.

FXTM chief mar­ket strate­gist Hus­sein Sayed said whether oil prices will con­tinue to surge de­pends on mul­ti­ple fac­tors – whether coun­tries other than non-Opec Rus­sia will com­mit to a cut; the mon­i­tor­ing process; the pace of US drillers’ re­turn to the mar­ket if oil prices hold above US$50 a bar­rel; and higher re­vi­sions due to US Pres­i­dent-elect Don­ald Trump’s in­fra­struc­ture poli­cies.

If oil trades in the range of US$50 to US$60 a bar­rel, Hus­sein be­lieves shale isn’t likely to re­turn in mas­sive lev­els.

“How­ever, if prices spike above US$60, then the shale in­dus­try will re­turn as a ma­jor player to re­bal­ance prices. The bot­tom line is Opec’s deal will put a floor to the down­side, but on the up­side mul­ti­ple fac­tors should be taken into con­sid­er­a­tion,” he said.

While a sup­ply cut will ac­cel­er­ate price re­cov­ery, May­bank IB Re­search said, at­ten­tion should be on de­mand growth, which is more fun­da­men­tal.

May­bank IB Re­search ex­pects Brent prices to av­er­age US$42.50 and US$47.50 per bar­rel in 2016 and 2017, re­spec­tively.

Mean­while, PublicIn­vest Re­search is main­tain­ing its neu­tral view pend­ing the im­ple­men­ta­tion of the cuts.

None­the­less, it is in­creas­ingly in­clined to the view of a fun­da­men­tal re­bound for the oil mar­ket, al­beit on a more grad­ual ba­sis, with a sup­ply crunch ahead ex­pected as soon as end-2017.

May­bank IB Re­search said, apart from Opec’s pol­icy direc­tion, it is mon­i­tor­ing closely a rise in global oil cap­i­tal ex­pen­di­ture and the ac­cel­er­ated re­bal­anc­ing of the global oil de­mand­sup­ply sit­u­a­tion as the other two key sig­nals for signs of a re­cov­ery.

“At this junc­ture, there are no clear in­di­ca­tions of a turn­around yet in the other two con­di­tions to sup­port a much stronger re­cov­ery in oil prices,” it said.

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