26/9/06 (The Star)  - PETALING JAYA: The decline in oil prices will benefit airlines but could adversely affect biodiesel ventures by commodity-based companies, analysts said.

An analyst said the oil price changes could lead to concerns over the commercial viability of biodiesel.

“This oil price decline will show how the market will test the strength of biodiesel players.

“If the selling price is not attractive, it will not be viable for players to enter into this venture without regulated demand,” he said.

Another analyst said that in this current timeframe, biodiesel ventures were not favourable. Other factors like a clear biodiesel policy would also influence the success of these ventures, he added.

At 5pm yesterday, crude oil prices on the New York Mercantile Exchange stood at US$59.81 while London's Brent crude was US$59.36.

In another development, Reuters quoted Plantation Industries and Commodities Minister Peter Chin as saying the Government planned to complete a review of its biodiesel licensing policy by early next year.

“We are reviewing the whole way in which licences are being given, the way people have got licences, whether they are operating, and whether they are proceeding,” Chin, who was in Mumbai, India to attend an edible oils conference.

The whole process would take a few months, he said, adding that biodiesel producers would need to look at the cost of production and competitiveness against other fossil fuels and palm oil.

“(However), the fact that the oil price has come off a bit is favourable news, particularly for Malaysian Airline Systems Bhd (MAS) and AirAsia Bhd,” an analyst said.

These stocks are direct beneficiaries of oil price movements, with AirAsia benefiting quicker than the national airline as the former’s fuel prices were hedged up to June this year.

Another analyst said the current situation presented an opportunity for AirAsia to time its next round of fuel hedging well.

The drop in oil prices would have a larger impact on the airlines’ earnings compared with pricing of fares, he said, referring to the recent fare slashing measures taken by MAS.

Asked if this oil price decline would result in airlines removing their fuel surcharge, he said it depended on whether the current state of oil prices could sustain.

“The trend is expected to continue until the year-end but it is a delicate situation,'' the analyst said. “If there is too much pullback on production, increases in demand will cause prices to overshoot.”

It was reported last Saturday that oil prices had tumbled to between US$60 and US$62 per barrel, driven by high US inventories, excess supply in the Organisation of Petroleum Exporting Countries and also the Amaranth Advisors LLC issue.

But, one analyst said it was too early to say if the decline would be long term as the winter months – which would affect demand – had not started. 

“Also, if the Middle East uncertainties continue, prices can rebound to US$70,” he added.