Bullish oil prices will lend support to ringgit

Malaysia’s financial, currency and equity markets are expected to face volatility when they open today

By MARK RAO / Pic By BLOOMBERG

High global oil prices would cushion any short-term volatility to ringgit-denominated assets, including the equity market, following last week’s shocking general election results.

Oil prices rose beyond the US$77 (RM304.15) per barrel level as reduced supplies, higher demands and the escalating Washington-Tehran barbs pushed the commodity to its highest level since November 2014.

Malaysia’s financial, currency and equity markets are expected to face volatility when they open today after Pakatan Harapan ended Barisan Nasional’s 61-year rule in a hard fought 14th General Election last week.

Tun Dr Mahathir Mohamad, who was sworn in as the seventh prime minister last Thursday, had reiterated that there is no cause for the ringgit to devalue under the new ruling coalition.

Oanda Corp head of trading for Asia Pacific Stephen Innes said oil prices could rise to US$85 per barrel this year due to the combination of higher global demand, reduced supplies from Venezuela and OPEC compliance to the present production quota.

Innes said the higher oil prices would likely offset any heavy sell-down of ringgit-denominated assets as the local unit has often found support on a higher oil price floor.

“The longstanding and robust ringgit-oil price correlation will continue to hold true. The association is too apparent to ignore,” Innes told The Malaysian Reserve.

He also expects Malaysia’s central bank to maintain the interest rates although the higher crude oil prices could add to inflationary pressures.

The central bank maintained the Overnight Policy Rate at 3.25% during the Monetary Policy Committee meeting on May 10, stating that the current lending rates would ensure the domestic economy to grow steadily amid the lower inflation.

However, it noted that the trajectory of headline inflation will be dependent on future global oil prices which are uncertain at the moment, but the underlying inflation is expected to remain moderate.

Meanwhile, Innes said the oil prices direction would be dependent on the various scenarios, but the most prominent would be OPEC’s actions.

“The key in the equation is OPEC compliance. It seems to me, at this stage, there will be little chance of intervention or increased supply due to the Iran shortage.”

Washington’s decision to abandon the Iran nuclear deal and the escalating military conflicts between Iranian forces in Syria have given a new lease of life to the oil market that was battered since 2014.

US President Donald Trump announced last week that the US will exit from the 2015 multilateral agreement, which lifted previous sanctions imposed on Iran, in exchange for Tehran to limit its nuclear capability.

The re-imposition of US-led sanctions on Iran — a country which is said to make up approximately 4% of the global oil supply — could stop the flow of about 500,000 barrels of oil per day coming out of the Arab nation.

Saudi Arabia had indicated that it would help meet the demand if the sanctions imposed on Iran would create a shortage in the global oil market.

But analysts believed such action would only happen after consultation with Russia.

Saudi Arabia is the world’s largest crude oil exporter, shipping 9.3 million barrels per day in January with Russia pumping 7.4 million barrels daily.

Innes said the prices are at risk if Russia decides to sway away from its production commitment and there is an increase in the US shale production.

He said while oil price floor for the year is well-entrenched, forecasts for 2019 are likely to be more bullish.