Weaker global economy poised to affect oil prices

PETALING JAYA: Bearish sector fundamentals and the trade war are set to weigh on crude oil price as physical demand is impacted by the prospects of a weaker global economy.

The high tariff announced by the White House last week and the Organisation of the Petroleum Exporting Countries and its allies Opec+ decision on April 3 to raise production levels beginning May saw the energy market tank with the Brent crude oil futures contract price falling to a four-year low of US$63 a barrel at press time with analysts warning more downside is possible.

BMI, a unit of Fitch Solutions, stated energy markets were pricing in the cartel’s plan to accelerate the return of earlier cut barrels to market in May.

Under its previous production schedule, published in December 2024, Opec+ was due to raise supply by 135,000 barrels a day in May but at its latest meet the group announced it will increase output by 411,000 barrels a day, which is equivalent to the planned May increment and two additional monthly increments.

“Under the previous schedule, the group was set to gradually raise its production over April 2024 to September 2026.

“Under the current rate of increase, the group’s 2.2 million barrels a day of cuts would be returned in full by the end of this year.

“Further (price) declines are all but inevitable, as market participants weigh the risk of recession in both the United States and global economies.

“We are in the process of assessing their impact on both the physical demand for oil and sentiment in the oil market,” the research outfit stated in a report, adding it will look to revise its price forecast in the coming weeks.

The lower crude oil price and market jitters saw the local energy index (BM Energy) fall some 10.9% or 76.9 points to 642.4 points yesterday as sector companies came under selling pressure, much like the broader market.

Hibiscus Petroleum Bhd’s share price fell 18 sen to RM1.45 while Bumi Armada Bhd fell 7.5 sen to 46.5 sen.

Dialog Group Bhd eased 21 sen to RM1.23, MISC Bhd fell 51 sen to RM6.72 and Dayang Enterprise Holdings Bhd was down 23 sen to RM1.56.

AmBank Research, in a strategy report, stated that while the import of crude oil, natural gas and refined energy commodities products are exempted from the new US tariffs, the sector could be prone to feel the implications of a potential global economic recession, which could then weaken global energy demand and reduce oil imports by major energy consumers.

“This macro uncertainty is expected to exert further downward pressure on oil prices, which are already weighed by Opec+’s gradual production ramp-up,” the firm said.

That’s not good news for the oil and gas (O&G) sector investors who have to deal with the switching issues like Petroliam Nasional Bhd’s financial reporting to every half yearly, rightsizing initiatives and as ongoing discussions with Petroliam Sarawak Sdn Bhd continue to cast uncertainties over the sector as capital expenditure (capex) spending targets by upstream players remain unclear.

CGS International Bhd said O&G services companies have a historical share price correlation to the Brent contract ranging from 29% (Velesto Energy Bhd) to 39% (Wasco Bhd), driven by the impact on their revenues if upstream oil companies cut their capex spending in a low oil price environment.

It added Yinson Holdings Bhd’s historical correlation is low at 13% on account of its long-term contracts but it thinks the future correlation will be higher as it has committed to raise US$1bil in high-cost preference shares.