Oil and gas, plantations to benefit from high crude oil prices
The Star Online (09/01/2020) - KUALA LUMPUR: CGS-CIMB Equities Research sees oil and gas (O&G) and plantation companies as potential winners if crude oil prices stay elevated, while airline, shipping, rubber gloves and petrochemical companies may be impacted due to higher operating costs.
The research house said on Thursday potential winner in the short term from higher oil prices is Dialog.
“We maintain our end-2020 KLCI target of 1,636, but near-term market sentiment may be adversely impacted if the US–Iran tensions escalate. Our top three picks are Pentamaster, YINSON HOLDINGS
and Tenaga Nasional, ” it said in its strategy report.
On Wednesday, Brent crude oil prices rose by as much as 4% to US$72 per barrel, before retreating to close at US$67 per barrel, after Iran fired more than a dozen missiles at US-Iraqi airbases, a direct attack on American forces in the region, following a US airstrike that killed top Iranian general Qassem Soleimani last week.
At the same time, there were signs that both sides wanted to pull back from the brink of conflict, with Iran’s foreign minister saying his country did not wish to go to war and President Donald Trump pronouncing that “All is well”.
“As a net O&G exporter (+RM23.5bi in Janauary-November 2019), Malaysia’s current account is insulated from the full force of sharp oil price spikes, ” it said.
CGS-CIMB Research said although Malaysia ran a net petroleum deficit of RM9.4bil in Jan-Nov19 — with refined petroleum product net imports (RM10.7bil in Jan-Nov19) outweighing crude petroleum net exports (+RM1.3bil in 11M19) – a large chunk of the energy trade surplus is contributed by LNG (+RM32.9bil in Jan-Nov19).
“Hence, if LNG moves in lockstep with oil prices or substitute for potentially displaced crude supply from the Middle East, Malaysia’s current account position stands to benefit to the tune of 0.1%-0.2% of GDP per US$10/bbl, ” it said.
Globally, an extended oil price shock represents a windfall for producers and a tax on consumers.
The distributional effect on households in Malaysia tends to be softened by fiscal contributions from the energy sector and fuel subsidies at the expense of government finances.
“While Malaysia benefits from incremental oil-related fiscal revenue of RM3bil for each US$10/bbl in excess of the Budget 2020 assumption of US$62/bbl, the decision to indefinitely postpone the implementation of the targeted mechanism for RON95 exposes the fiscal balance (Ministry of Finance: -3.2% of GDP in 2020) to a deterioration of RM1.7bil, or 0.1% of GDP per US$10/bbl hike, due to higher fuel subsidies.
“A sizeable energy trade surplus puts Malaysia in a more advantageous position to mitigate the impact of a full-blown US–Iran conflict and sharply higher oil prices, which could raise global inflation by 0.4% pt per US$10/bbl and lower global GDP growth by 0.4-0.5% pt.
“In the short term, currencies tend to take the brunt of adjustments in supply driven oil price expectations. In recent years, Malaysia’s ringgit has exhibited a positive correlation to oil prices, ” CGS-CIMB Research said.