Crude oil prices to benefit govt coffers despite upstream lag

The US pulling out of the Iran nuclear deal and tensions in the Middle East have been supporting the uptrend in energy prices


Rising crude oil prices may be beneficial for government revenue on higher tax collection from industry players and better dividend payout from its national oil and gas (O&G) company.

However, capital spending in the upstream sector is expected to continue to lag behind industry recovery as the higher oil price environment is dependent on geopolitical factors, thus creating uncertainty in the oil market.

Crude oil prices rose from about US$50 (RM199) per barrel last year to trend near the US$80 per barrel mark last week on the Brent index, as the market gradually recovers from the 2014 oil crisis.

The US pulling out of the Iran nuclear deal and tensions in the Middle East have been supporting the uptrend in energy prices in expectation of a significant chunk of production to come offline.

OPEC and non-OPEC compliance to keep supply levels in line with demand has also pushed prices higher.

As a net exporter of crude oil, Malaysia is set to benefit from the current price environment.

“The prevailing crude oil prices, which are above the 2018 budget benchmark, is certainly a boon to government coffers,” Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told The Malaysian Reserve recently.

“As such, it may help the government collect taxes from the O&G sector as well as better dividend from Petroliam Nasional Bhd (Petronas).” According to a Bloomberg report, crude oil prices above US$70 per barrel should double Malaysia’s government revenue from RM5 billion to RM10 billion.

Higher oil prices also augur well for Petronas’ upstream business, which contributed 60% of the national energy company’s RM223.62 billion revenue last year. While a higher oil price floor nominally results in thinner margins for the downstream business, Petronas would likely pass through the cost to consumers to offset this.

The O&G company paid RM16 billion in dividends to the government last year and has already committed to pay RM19 billion in 2018, while capital expenditure (capex) for the year is expected to sit around the RM55 billion mark.

Still, capital spending by oil majors including Petronas is expected to be conservative for the year as uncertainty over the direction of oil markets remains intact.

Oil majors holding back on spending is to come at the expense of many O&G service and equipment companies in the industry who depend on contracts and work from national O&G companies.

“It remains to be seen whether the upstream sector will kick-start capex in a big way, especially since higher oil prices are very much driven by geopolitical reasons,” Mohd Afzanizam said.

“As it is, there is still excess capacity in the sector, so O&G companies would be mindful on capex.”

He added that the sustainability of O&G revenue for the government could be a concern in the context of a shift in structural demand in oil owing to renewable energy (RE) and RE technologies.

On oil market front, US crude inventory came in higher than market expectations as inventories rose to 5.8 million barrels for the week ending May 18 this year.

The inventory build exerted some downward pressure on crude oil prices towards the tail end of last week.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the potential increase in OPEC output to offset supply concerns is creating bearish sentiment in the market.

“In the absence of another negative supply surprise, the top-side moves will likely be capped by short-term traders’ propensity to fade these moves on the assumption OPEC opens the spigot,” he said, but added that it is unlikely that OPEC and non- OPEC compliance will buckle under present circumstances.

“There will be a gradual supply accommodation commensurate with global demand rather than a decisive policy shift, thereby most likely keeping the three- to six-month US$80 per barrel views intact.”