SUMMARY

● Since the advent of COVID-19, oil prices have plunged, reflecting the colossal imbalance in the supply and demand of oil globally, as countries that account for a major chunk of global oil consumption have been severely hit by the pandemic. Nevertheless, prices have charted some recovery since end-April and expected to remain above USD40 per barrel on OPEC+ continuedproduction cuts and gradual economic reopening.

● The impact of oil price volatility on Malaysian financial markets is significant, especially on the ringgit and FBM KLCI. Falling oil prices has the tendency to weaken the ringgit and exert downward pressure on the KLCI.

● Malaysia’s economy has managed to reduce its dependency on the mining sector since the 2008/09 Global Financial Crisis given its smaller contribution to GDP growth as well overall exports. However, oil-related revenue contribution to the government’s treasury remains high.

● On the assumption that average oil price will hover around USD40-45 per barrel till end of this year and our 2020 GDP projection of 2.9%, fiscal deficit is projected to widen to 6.5% and debt to GDP ratio to reach 60.1%, amid government’s huge COVID-19 fiscal rescue package.

● The emergence of deflationary trend along with the weak economic growth provide justification for the government to finally remove fuel subsidy and BNM to embark on further monetary easing.

● Over the past three decades, there have been five episodes of major oil prices slump,including thelatestoil price war between Saudi Arabia and Russia. Compared to the previous episodes of oil prices fall, the recent oil price shock was unprecedented as the world was caught off-guard by the coronavirus pandemic. To recap:

- Gulf War (1990-1991): a spike of 158.0% in Brent crude price from USD15.6/bbl to USD40.2/bbl in October 1990 was reversed by the first Gulf War in history as Iraq invaded Kuwait due to their oil dispute. As a result, oil majors with higher costs than OPEC were forced to delay their production projects to stabilize the oil prices.

- Asian Financial Crisis (1997-1999): a sharp decline in Brent price (USD9.6/bbl) in December 1998 was mostly due to hampered demand. The oil-exporting countries redress the crisis by three output cuts between March 1998 and March 1999, withdrawing 4.3m barrels per day (bpd) of oil.

- Global Financial Crisis (2007-2009): as Brent crude price roared to an all-time high of USD146.1/bbl in July 2008, a severe contraction in global demand had subsequently dragged the commodity price to USD36.6/bbl in December. OPEC reacted by agreeing to withhold a combined 4.2m bpd from the market.

- 2014 Oil Crash (2014-2016): a significant shift in OPEC policy, resulting in a rising capacity of oil production from non-OPEC producers coupled with weakening global demand, had caused the crude oil prices to crash in 2014. To note, the lowest Brent crude price recorded during the 2014-2016 oil price plunge was USD27.9/bbl on 20 January 2016. During this crisis, Saudi Arabia and Russia collaborated to create OPEC+, and the group agreed to its first cuts in 2016 to boost oil prices.

● The recentweakness in oil price is reflective of the colossal imbalance inthe supply and demand of oil globally, exacerbated further by the COVID-19 pandemic

- On a long-term perspective, since 1994, the oil market has mostly remained in a state of an oversupply (16 years), as oppose to undersupply (10 years), with an average production surplus of 0.2m bpd.

Source: Kenanga Research - 17 Jul 2020