Opec deal seen as positive for ringgit
> However, currency continued its downward trend against US dollar yesterday, albeit slightly
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.