CHRISTMAS cheer came early this year. Least expected was for Santa Claus to deliver one of the big surprises of 2014 — low oil prices.
Crude oil prices have dipped to the lowest level since the global crisis. The 50 per cent slump in prices which set in since July was not seen in most of economic forecast reports as most of the noise was focused on locations like Iran, Iraq, Russia and Ukraine and sanctions.
Neither were expectations of falling global food prices cited.
For economists, geopolitical risks played a bigger role in dictating the tone of the prices until the Organisation of Petroleum Exporting Countries stuck firmly to its position of not cutting production.
As Standard and Poor’s admits when it flagged geopolitics as a key macro risk this year with the likely channel being higher oil prices that could put a crimp on the global recovery. The focus on oil was correct but the call was directionally wrong.
The soft prices are expected to remain for at least the next six months, although some predict that prices may remain so until end-2016.
Timing is the key. For the prices to correct themselves, demand must shine its way through.
Since the recovery of the global economy is still wobbly, there are arguably wide-ranging estimates as to when the prices will stabilise.
When prices plummeted in early December, the benchmark Brent crude, which is the preferred price market for countries like Malaysia, sank to
a low of US$67.53 (RM235.60) a barrel.
The US benchmark West Texas Intermediate for delivery in January hit US$63.72 a barrel — the lowest level since July 2009.
While Malaysia stands to lose as a net exporter due to the low prices, it benefits from inflationary pressures on necessities and that leads to higher consumption activities.
Malaysian motorists will enjoy checking out the managed float pricing system when it takes shape next year.
It is estimated that every US$10 decline in oil prices may cause a RM2 billion to RM3 billion drop in revenue although the country will also gain RM5 billion in savings.
Granted our fundamentals have enabled us to be resilient to various shocks, but the mix of a strong US dollar and impending US interest rates, still wobbly global recovery and weak oil prices will prove to be quite challenging to the treasury and the central bank next year.
Meeting the fiscal deficit to gross domestic product target of three per cent next year will be tough if the oil prices slip further while Bank Negara Malaysia will likely have to cut rates to restore confidence among consumers and businesses.
Up till now, it has been hard to ascertain at what price level “would oil become uneconomic”.
Another concern with investors is when Petroliam Nasional Bhd and other petroleum or energy firms indicate capital expenditure (capex) cuts. Not only would stock prices be rattled by such actions but also the economy.
For Fitch Ratings, low prices and high capex can potentially weaken credit metrics for rated oil and gas firms in Southeast Asia. However, ratings will remain stable next year. This is because companies in the region need high capex to maintain and increase upstream and mid-stream production capacities.
Fitch has indicated its concern about Malaysia, the risk of a twin fiscal and external deficit which could spark volatility in capital flows.
With all the festive cheer over, low oil prices and its impact on consumables, less cheerful are Malaysians who have to support their children’s education in the US.
Christmas cometh early but we could do with more trimmings and gifts.
Merry Christmas.