• Brent crude has been surprisingly lethargic even with the brewing conflict in the Middle East and the winter season in the Northern Hemisphere

• How would oil price fair in the coming weeks and hence, sentiment against FBMKLCI?

It has been disconcerting watching the oil price movement even with the brewing conflict in the Middle East (ME) and the start of the winter season in the Northern Hemisphere. For the record, oil price, using Brent crude as a benchmark, dropped below the support level of USD80 per barrel last Wednesday, to close at USD79.54 per barrel. This is a 4-month low and lower than YTD 2023 and 2022 average of USD82.65 and USD98.96 per barrel respectively. This is sharply lower than the peak of Russia and Ukraine conflict where Brent crude reached a high USD138 per barrel, a few tads lower than the historical high of USD147 per barrel (2008). It is puzzling amid the ME region that produces a third of global oil supply. Is the Hamas-Israel war risk premium is unwinding? We think so.

So far, we are seeing a muted impact of the brewing conflict in the ME even with the on-going sizeable supply cut by Saudi Arabia and Russia totaling 1.3mn barrel per day, which have been extended until December. Whether this will be revised upward or downward will be determined at the end of November following the global oil minister meeting in Vienna (Austria). The self-imposed cut by Saudi Arabia and Russia could be extended beyond December whilst, OPEC+, which already agreed on supply cut by 3.66mn barrel a day (until end 2024) could increase this further (the quantum) given the downside risk to oil price.

Oil price has been dented by ‘demand risk’ particularly from China amid the country’s economic activity that could moderate in 2024 (4.5%; 2023E GDP: 5.0%). This covers the US as well amid the country’s recession risk that currently touches 55% (US 2024F GDP: 1.0%; 2023E: 2.3%). Russia’s economy is also expected to slowdown (2024F GDP: 1.3%; 2023E: 2.0%). Note that these countries make up close to 50% of global GDP. This prognosis is less-than-stellar for oil price. The conflict in ME seems contain for now with the US reportedly pumping more to keep the oil price steady, if not low. The concern is if the oil price slips further given the less-thanfavourable dynamics as this could hurt sentiment against Malaysia amid the government that projects oil price to average at USD80 this year (YTD average: USD82.65 per barrel).

Should oil price remains lethargic and slips below USD80 per barrel for an extended period, we foresee FBMKLCI could face the brunt. On this score, the next support level for Brent crude is at USD78 and USD70 per barrel. USD87 and USD97 barrel is the next resistance level. In any case, oil price is expected to hold up at circa USD80 for the rest of 2023 given the expected weakness of USD and the global oil minister meeting in Vienna that could be a precursor of a larger cut in global oil supply. No change to our year-end FBMKLCI year-end target of 1,550-points amid the downside risk to oil price that seems to be capped for now.

Source: BIMB Securities Research - 13 Nov 2023