An escalation sparking a wider regional conflict in the Middle East could see oil prices surging above US$100 which, ironically, may result in a windfall for Malaysia’s oil and gas (O&G) sector players, according to analysts.
Oil prices spiked sharply early last Friday on news that the US launched airstrikes on two locations in Syria linked to Iran’s Revolutionary Guard Corps. The Pentagon said this was in retaliation for drone and missile attacks against US bases in the region.
If the US and Iran get into a shootout, all bets are off given that Russia and China are unlikely to sit idly by while their ally Iran is attacked. Note that Iran is due to become a member of the BRICS economic bloc, led by Russia and China, in January 2024.
MIDF Research said if the Israel-Hamas conflict escalates into a wider regional conflict, oil prices may rise in response to tightening supply and dwindling global inventories.
However, it said if the conflict remains confined to just Israel and Hamas, it will likely not have an impact on oil supply and oil prices.
“Palestine is not an oil-producing country and Israel does not explore or produce oil within the vicinity of the conflict,” MIDF Research told FMT Business.
However, Rakuten Trade vice-president of equity research Thong Pak Leng said while Israel is not an oil exporting country, conflict in the region may have an impact on the logistics of crude oil.
“Hence, oil prices may stay at a high level for the moment,” he told FMT Business. The price of Brent crude was hovering just above the US$90 per barrel mark at the time of writing.
Bank Muamalat chief economist Afzanizam Rashid said with the conflict’s proximity to oil and gas production zones in the region coupled with the potential for escalation, the upside risks to crude oil are “clearly visible”.
“If it is prolonged, and the conflict evolves into something larger, it may cause crude oil prices to rise,” he told FMT Business.
Geopolitical uncertainties
Monash University Malaysia economics professor Niaz Asadullah noted geopolitical uncertainties can cause excessive speculation in the world crude oil market, increasing prices “well beyond the forces of supply”.
“We have already experienced a surge following the outbreak of the Russia-Ukraine crisis which involved two oil-exporting nations,” he told FMT Business.
The onset of the Russia-Ukraine war in February 2022 saw the price of Brent crude oil increase to an eight-year high of US$140 in March last year as the conflict disrupted global supply chains.
Niaz added the situation may deteriorate further if other natural resources-rich Middle Eastern countries, such as Iran, are drawn into the conflict.
Of strategic importance is the Strait of Hormuz, which lies between Oman and Iran, and is arguably the most critical gateway to the world’s oil industry.
More than a fifth of global oil supply flows through this narrow channel, a chokepoint which is 33km wide at its narrowest. Most critically, the shipping lane is a mere 3km wide in either direction.
An average of 20.5 million barrels per day (bpd) of crude oil, condensate and oil products passed through Hormuz between January and September 2023, according to analytics firm Vortexa.
Analysts and market observers say an escalation of the conflict could prompt the US to tighten sanctions on Iran, which may spur Tehran to take retaliatory action against ships in the Strait of Hormuz. If that happens, oil and liquefied natural gas (LNG) prices will shoot through the roof.
Petronas’ potential windfall
Niaz said a prolonged conflict and rising oil prices could significantly benefit Petronas and boost Malaysia’s revenue and government dividends.
“There is a clear prospect of windfall gain as Malaysia enjoys energy trade surplus on two fronts – LNG and crude petroleum,” he said.
As for the government, he added that benefits from a windfall dividend would depend on how it is used.
“It depends on whether (it seeks) to expand the export and investment capabilities of government-linked investment companies (GLIC) in the O&G sector, or finance politically popular handouts such as energy and fuel subsidy,” he added.
Based on the current projection, Malaysia’s petroleum reserves are set to last for only another 15 years, he pointed out.
“To ensure Malaysian O&G companies’ survival beyond 2040, (proceeds from) rising oil prices should be reinvested in new technology and exploration for new oil and gas fields,” he added.
Moving forward, MIDF Research said the overall outlook for the Malaysian O&G sector is positive for the near future.
It said that the price of Brent crude oil had stayed elevated at US$86-92 per barrel, and believes it will stay within that range until the end of the year.
“For the downstream, fuel products will remain elevated, mirroring Brent, but our government is still controlling the prices with subsidies.
“Natural gas has a laggard of six months, so in the near term, we are expecting lower sales volume in accordance with the lower Brent price in mid-2023,” it said.
It added that the near-term petrochemical outlook is expected to remain flat due to higher supply than demand.
Beneficiaries of higher oil prices
MIDF Research said that MISC and Bumi Armada would benefit the most from an elevated oil price due to their advantage in floating production storage and offloading (FPSO) and offshore service vessels (OSV).
“For the midstream, Gas Malaysia and Petronas Gas would see more benefit in the elevated Brent as Malaysia Reference Price (MRP) follows the trend in Brent price. However, note that they have a laggard of about six months,” it added.
Meanwhile, Afzanizam said higher crude oil prices would benefit the oil and gas players especially those who operate in the upstream sector.
“It may incentivise the oil majors to spend a bit more capex which would translate into demand for service providers and asset utilisation,” he said.
While surging oil prices may benefit Malaysia given it is an oil producing nation, it is also a doubled-edged sword. The flip side is that higher oil prices will translate into higher inflation, which will hurt Malaysians especially those in the lower income bracket.
Elevated inflation will in turn force central banks to resume hiking interest rates, which will hurt borrowers and businesses, and pile even more pressure on the already weak ringgit.