- The International Energy Agency said on Tuesday that global demand for oil would be much weaker than previously expected, suggesting that oil prices may decline further.

- As at YTD September, the average crude oil prices for WTI and Brent were USD99.62 and USD106.99 per barrel respectively. As a recap, BNM’s full-year price assumption for crude oil is USD105 per barrel for 2014.

- Note that the WTI and Brent crude oil prices registered monthly averages of USD93.03 and USD98.57 per barrel respectively in September.

- Meanwhile, the petrol pump prices for RON95 were adjusted higher by 20 sen to RM2.30 per litre on 2 October, which lowers the government subsidy to RM0.28 per litre.

- If global crude oil price falls further, the government fuel subsidy will reduce even without the adjustment in the petrol pump prices.

- Based on our estimate, government subsidy on RON95 petrol will reduce by RM0.26 per litre should the global crude oil price fall by 10%.

- As such, we estimate that the breakeven of the global crude oil price is at an average of USD84.80 per barrel if RON95 remains at RM2.30 per litre without government subsidy.

- The provision for overall subsidies amounts to RM37.7bil (or -7.1% YoY) for 2015 as the government expects the Brent crude oil to trade at an average of USD100 per barrel.

- Assuming that the government allocates RM21bil for fuel subsidies in 2015, thus, a reduction in the global crude oil by 10% could potentially reduce overall subsides to about RM35.6bil (or -RM2.1bil per annum).

- The government aims to eventually float the RON95 petrol price to market rate while providing a more targeted based petrol subsidy to the low income group.

- Hence, petrol pump prices will likely float according to market rate once the government implements the targeted based subsidy programme.

- Based on yesterday’s close, the WTI and Brent crude oil prices stood at USD80.66 and USD83.78 per barrel respectively.

- All in all, we expect headline inflation to register a full-year average of 3.2% in 2014 and 4.2% in 2015 on the back of higher domestic cost and reduction in subsidies.

- Ahead of the inflation statistical release by the Department of Statistics on 17 October, we anticipate an inflation growth of 2.5% for September vs. 3.3% in August.

Source: AmeSecurities