However, elevated oil prices also represent a double-edged sword that will potentially spark a resurgence in inflation and higher interest rates that could derail the global and Malaysian economies.
“Globally, every geopolitical crisis is good news for oil and gas (O&G) companies as export prices tend to rise,” said Monash University Malaysia economist Niaz Asadullah.
He said O&G giants like Petroleum Nasional Bhd (Petronas) will benefit in terms of windfall gains from elevated oil prices. This will translate into higher dividends for the government but that could be nullified by a higher subsidy bill for petrol and diesel.
On the flipside, Niaz said, a major Israeli attack on Iran would see an increase in freight costs to disruptive levels, adversely impacting local export and import volumes.
“Beyond the increase in oil prices, we have to factor in the second order effect of the conflict on shipping costs for countries like Malaysia where 90% of trade is maritime,” he told FMT Business.
“We’ve already seen a 50% drop in trade through the Suez Canal in the first two months of 2024 compared to a year earlier. I expect further drops and parallel increases in sea freight rates if the Red Sea shipping crisis intensifies.
“The worst-case scenario involves the risk of a global recession – a wider war would only intensify geopolitical tensions and disruptions to supply chains.”
Prices to remain high
MIDF Research forecasts crude oil prices to remain elevated, fluctuating between US$80 and US$92 per barrel (pb), supporting higher production and higher demand for equipment, maintenance and services within the upstream projects’ timeline.
It said the reversal of this trend could hinge on unprecedented events such as demand destruction, a global pandemic or escalating regional conflicts within oil-producing nations.
“The Organization of the Petroleum Exporting Countries (OPEC+) still has the power to control its production output to maintain the prices at such a range, even when the US crude oil inventory is being replenished.
“Should prices go below US$80 pb, major oil and gas players would still make a profit or break even,” it said.
On mid-sized companies that would benefit from elevated crude oil prices, MIDF picked Hibiscus Petroleum Bhd, Velesto Energy Bhd, Deleum Bhd, Dialog Group Bhd, Sapura Energy Bhd, and Bumi Armada Bhd.
It said that key risks that O&G companies potentially face amid rising oil prices include cost inflation, geopolitical risks, a shift towards renewable energy, and political instability.
Meanwhile, a research house analyst said the offshore service vessels (OSV) segment – a laggard and highest beta play on upstream capex upcycle – is expected to benefit from high oil prices.
“Our smaller cap picks are Icon Offshore Bhd (target price (TP): 80 sen) and Uzma Bhd (TP: RM1.45),” said the analyst, who declined to be named.
In a worst-case scenario where the Middle East tensions escalate into a regional conflict, he anticipates that oil prices will breach US$100,
As of the time of writing, Brent crude traded at US$86.60 pb, with Moody’s Analytics projecting an additional US$5 pb to be added to the risk premium, potentially pushing oil prices into the range of US$90 to US$95 pb.
Last weekend, Iran launched hundreds of drones and missiles in a retaliatory strike following an Israeli strike on its embassy compound in Syria on April 1.
News reports said suspected Israeli drones hit a site in Iran on Friday. So far, Tehran has not flagged plans for a retaliation against its arch enemy.