Middle East tensions ‘a double-edged sword’

Higher oil prices are good for the O&G stocks, but exporters are not exactly revealing, says Innes


THE surge in oil prices due to tensions in the Middle East may be a boon for the local oil and gas (O&G) stocks, but it could burden the government.

AxiTrader chief Asia market strategist Stephen Innes said, while the higher oil prices will be good for the Bursa Malaysia’s O&G constituents, it has the potential to be a dampener for economic growth among the country’s key trade partners.

“The higher oil prices are a bit of a double-edged sword, good for the O&G stocks, but exporters are not exactly revealing,” he told The Malaysian Reserve (TMR).

Innes noted that risk aversion trades will typically win out if the US and Iran continue to march down the road of no return, which in turn will not be good for regional sentiment.

“I expect tensions to intensify before abating and we should anticipate defensive strategies to flourish and ultimately, I think this will weigh on riskier assets like Malaysian stocks and bonds as the market heads for the insurance umbrella of US bonds,” he said.

Innes is surprised gold has not traded above US$1550 (RM6,358)/ oz, and equally nonplussed Brent crude has not convincingly breached US$70 per barrel levels, but that may come in good time if the US and Iran edge closer towards an all out conflict.

Last Friday, the head of the Iranian Revolutionary Guards’ elite Quds Force General Qassem Soleimani was killed by US forces in Iraq.

Global oil prices soared more than 3% in the wake of the strike with Brent contract rising US$2.25 a barrel or 3.4% to US$68.56 a barrel at the time of writing.

Innes further added that higher oil prices always throw a spanner into the works for Asia’s colossal energy importers.

“Its a double-edged sword among Asia-Pacific’s oil-exporting countries, such as Malaysia, which is still a net energy importer. Higher oil prices are a significant risk for Asian economies,” he noted.

Data from Bloomberg showed that Hibiscus Petroleum Bhd, Sapura Energy Bhd and Petronas Gas Bhd (PetGas) were among the most actively traded counters due to the spike in crude oil prices.

Hibiscus rose 2.6% — highest in 15 weeks — to 99.5 sen from 97 sen previously. Trading volume was nine times the average at this time of day.

Sapura Energy closed unchanged at 27.5 sen. Trading volume was double the average at this time of day.

PetGas rose 1.1% or 20 sen to RM17.14. Trading volume was 27% below the 20-day average for the day.

The benchmark FTSE Bursa Malaysia KLCI closed 8.9 points or 0.55% higher at 1,611 last Friday.

Economist Prof Emeritus Dr Barjoyai Bardai said local oil companies, especially Petroliam Nasional Bhd (Petronas) is set to benefit from rising oil prices amid the US-Iran crisis.

He cautioned higher energy prices could put a burden on the government, especially on fuel subsidies.

“The government is expected to allot more money to subsidise the fuel, as oil prices will definitely increase.

“There is also fears inflation may increase as a result of this event and deter public spending and consumption,” he told TMR.

Rakuten Trade Sdn Bhd VP of Research Vincent Lau reckons the impact towards the stock prices of O&G counters to be short term, unless there is a war or escalation of the conflict.

“Tension will remain and all eyes will be on any retaliation action,” Lau told TMR.