PETALING JAYA: The recent rally in crude oil prices has provided relief to the administration of Prime Minister Datuk Seri Anwar Ibrahim whose budget for the year is based on an average crude oil price assumption of US$80 (RM361) a barrel.
In the past three months, Brent-grade crude oil prices mostly ranged below that figure, raising concerns about the government’s ability to pay for its record-high expenditure this year.
Malaysia is reliant on oil money with petroleum-related revenue expected to contribute RM65.2bil or 22.4% of the government’s total revenue in 2023.
In comparison, petroleum-related revenue was registered at RM82.4bil in 2022, including the additional dividend from Petroliam Nasional Bhd of RM25bil.
Since bottoming in mid-June, Brent grade crude oil has rallied by over 18% to close to US$85 (RM383) per barrel on the back of tightening supply, rising US petrol demand and technical buying.
The country needs the crude oil prices to sustain above the US$80 per barrel mark for the rest of the year.
Managing director of Datametrics Research and Information Centre Pankaj Kumar said the recent gains in global crude oil prices is seen as positive for the government.
“It is now more likely that the US$80 per barrel assumption that was used for this year’s budget will be met,” he told StarBiz.
Socio Economic Research Centre executive director Lee Heng Guie said higher oil prices are benefiting the government’s coffers.
“For every US$1 (RM4.51) rise in crude oil price, it will generate an additional RM300mil in oil-related tax revenue,” he said.
However, Lee noted that the country’s fuel subsidy would remain high – estimated at RM1 for every litre of RON95 petrol.
The RON95 petrol retails at a fixed price of RM2.05 per litre. Lee said the fuel subsidy for RON95 petrol is based on the oil price of US$80 per barrel.
“The pass-through effect of higher oil prices on consumer prices will be buffered by fuel subsidies.
“Nevertheless, the subsidy rationalisation on a targeted approach remains on the cards which will cause renewed inflation risk,” he said.
Given the blanket subsidies in place, Pankaj said the higher crude oil prices would have “little impact” on businesses and households.
Any price fluctuations will not be felt by businesses and households as the retail prices of RON95 and diesel are fixed by the government.
“However, the direct impact will be seen by airlines as jet fuel prices will likely rise in tandem with increase in global prices,” Pankaj added.
In the case of AirAsia X Bhd
(AAX), jet fuel historically accounted for 30% to 40% of the airline’s total costs, according to Maybank IB Research.
In a note last week, Maybank IB Research said higher jet fuel prices and the weaker ringgit against the US dollar would inflate expenses.
“We estimate that every US$1 per barrel increase in the average jet fuel price will reduce our earnings estimates by RM7mil to RM13mil.
“Yet, AAX has been able to pass on higher expenses to passengers via higher fares given that the aviation industry is now more rational and less competitive,” it added.
The research house’s average fuel price forecast for 2023 is US$100 (RM451) per barrel.
By end-December 2023, Lee expects Brent crude oil spot prices to reach between US$80 and US$85 per barrel.
In 2024, it is expected to average at US$82 (RM370) per barrel.
“Global crude oil spot and future prices have gradually increased, reflecting the tight supplies as the result of the Organisation of the Petroleum Exporting Countries and allies (Opec+) extending crude oil production cuts announced on June 4 and an extension of voluntary cuts through August by Saudi Arabia.
“Easing concerns regarding the weakening global economic conditions as well as expectations of the US interest rate tightening cycle coming to an end had also help to provide near-term price support.
“We expect production cuts, improving demand and reduced inventories to increase prices going forward,” he said.
Pankaj also pointed out that the key driver for the recent crude oil price rally was the demand optimism from the global energy sector.
The recent production cut by Saudi Arabia of one million barrels per day has shifted market equilibrium towards higher prices.
The cut by Saudi Arabia follows a reduction of 1.16 million barrels a day in April, which was voluntarily undertaken by eight members of Opec+, and a group-wide cut of two million barrels a day in October 2022.
It was reported that Saudi Arabia, the biggest oil producer under the Opec, required the price of Brent crude rising to be above US$80 a barrel to cover its government spending and import bill.
Beyond the drop in global production, Pankaj said the US dollar weakness was an additional catalyst for higher prices.
“As for impact on other commodities, we are not seeing a spillover impact just yet, although the Bloomberg Commodity Index is up by about 8.5% from the recent lows but still down by 5.4% year-to-date.
“On the medium term outlook, I think prices will come off from the recent gains mainly due to the softer economic momentum from major economies, especially out of China, while the direction of the US dollar too may impact price movements,” he said.
