Oil windfall — with a catch

JUST as markets were getting used to a US Federal Reserve (Fed) easing cycle, the narrative has been turned on its head.

The Fed embarked on an easing cycle in September 2024, cutting rates by 100 basis points (bps) that year and another 75 bps in 2025 to 3.5% to 3.75%.

At the start of 2026, markets were expecting another leg of rate cuts.

Instead, the US central bank has moved in the opposite direction, raising its benchmark rate by 25 bps to 3.75% to 4% last week, its first hike since July 2023, as inflation remains “elevated”.

The Federal Open Market Committee says the move would support a “timelier return” to its 2% inflation goal.

For context, US consumer prices rose 3.4% in August from a year earlier, and 0.4% from a month earlier.

Petrol prices alone rose 3.9% during the month, accounting for more than one-third of the monthly increase.

For financial markets, the significance is less about the 25 bps hike itself and more about the reversal in the direction of US monetary policy.

That matters for Malaysia because higher US interest rates can put pressure on the ringgit, government bonds and equities by lifting global borrowing costs and making US assets relatively more attractive.

But Malaysia is also sitting on the other side of the equation.

Oil prices have surged back above US$100 a barrel, giving the country a boost through petroleum-related revenues.

Lower global crude oil prices saw such revenue fall to RM58.7bil in 2025, accounting for 17.5% of total government revenue, down from 19.3% in 2024.

Spot Brent crude ended 2025 at US$60.85 a barrel before surging to as high as US$126.41 on April 30 this year amid the war in West Asia.

It subsequently fell to US$78.11 on Aug 5 before climbing back above US$100 on Sept 9. It briefly slipped below the US$100 mark earlier this week, but has since rebounded to about US$102.29 at last look.

So does US$100-plus oil ultimately leave Malaysia better off as an oil-producing nation, or are the benefit eroded by subsidies, inflation and tighter global financial conditions?

At home, the impact of higher oil prices has so far been relatively muted, helped by the government’s Budi95 fuel subsidy.

Malaysia’s headline inflation rose to 1.9% in August 2026 from 1.8% in July, according to the Statistics Department.

The economy, meanwhile, expanded by a stronger-than-expected 6% year-on-year (y-o-y) in the second quarter.

Still, protection from higher fuel costs does not mean Malaysia is insulated from the broader shock.

SPI Asset Management managing partner Stephen Innes says the immediate benefit of oil above US$100 comes through the terms-of-trade and fiscal channels.

“Higher energy prices support the government’s petroleum-related revenues and Malaysia’s external position, while also lending some support to the ringgit against currencies of energy-importing Asian economies.

“But there is another side to the ledger. The longer oil stays above US$100, the more pressure builds through fuel subsidies, transport costs and broader inflation,” he tells StarBiz 7.

“What initially looks like a commodity windfall gradually becomes more complicated for consumers and the fiscal position.”

Innes also says a more hawkish Fed could create a broader emerging markets risk-off environment, which is “probably the bigger market risk”.

Against this backdrop, he says Malaysia is “relatively better insulated, but not immune” to the combination of higher oil prices and tighter global monetary conditions.

“Malaysian government bonds would probably feel the global yield pressure first, while the ringgit could outperform some regional peers without necessarily strengthening aggressively against the dollar,” he notes.

As at Sept 16, the US Treasury five-year yield stood at 4.86%, while the 10-year yield was 5.01% and the 20-year yield 5.39%.

In Malaysia, the 10-year Malaysian Government Securities yield closed at 4.17% on Sept 15, up three bps on the day, while the five-year yield rose six bps to 3.92%.

Economist Yeah Kim Leng says higher US rates would have a “transmission impact” on other economies through a stronger US dollar and higher global borrowing costs, particularly for countries that rely heavily on imports.

While higher US rates can make US assets more attractive by offering higher yields, Yeah says there is also a risk that tighter monetary policy could slow the US economy.

Higher borrowing costs could weigh on consumer and business spending, particularly among highly leveraged households and companies, he adds.

“We do expect worsening financial conditions for borrowers in the United States, including highly indebted households and business sectors,” he says.

“That risk could encourage longer-term investors to explore other markets.”

For Malaysia, he says the net impact is “not really negative” thanks to the country’s trade position.

“In Malaysia’s case, the impact is likely to be muted. While we have a large share of imported goods, total exports exceed imports,” he says.

Malaysia recorded a trade surplus of RM147.15bil in the first half of 2026, with exports rising 27.5% y-o-y to RM971.59bil while imports expanded 16.9% to RM824.44bil.

Trade with the United States rose 25.7% to RM235.19bil during the period.

In June alone, total trade with the United States climbed 80.6% y-o-y to RM50bil, accounting for 14.7% of Malaysia’s total trade for the month. Exports more than doubled, rising 108.6% to RM34.71bil, driven by higher electrical and electronics shipments, while imports from the United States increased 38.4% to RM15.29bil.

A stronger US dollar could also work in favour of Malaysian exporters by increasing the ringgit value of their export earnings, Yeah says.

This would provide some relief after the ringgit’s appreciation over the past two years, which had reduced exporters’ competitiveness when foreign-currency earnings were converted back into ringgit.

The ringgit strengthened 9.2% in 2025, from RM4.4718 against the US dollar at end-2024 to RM4.06 at end-2025.

It gained a further 4.2% this year to as strong as RM3.8895 before settling at about RM4.0972 at last look.

Against this backdrop, Yeah says Malaysia “does not necessarily” need to follow the Fed with a higher overnight policy rate.

With the ringgit having already strengthened significantly, policymakers can afford to allow some reversal in the currency’s gains as part of the adjustment, he says.

Taken together, US$100-plus oil provides some protection for Malaysia, but still exposes the country to greater inflation and financial-market pressures if prices stay elevated for a prolonged period.

On balance, Innes says Malaysia remains “marginally” on the net-beneficiary side, especially relative to most of Asia.

“But the important word is marginally,” he says.

“At US$80 or US$90 oil, the benefits are much cleaner. Above US$100 for a prolonged period, gains to the energy sector and government revenues are increasingly offset by subsidy costs, inflation, and tighter global financial conditions.

“So Malaysia may win the relative Asian race, but that does not necessarily mean US$100-plus oil is an outright positive for the broader economy.”