Govt could lose up to one-third of oil revenue on price war

Crude oil price could further drop on the prospect of a price war between Saudi Arabia and Russia


MALAYSIA could be at risk of losing up to one-third of its potential oil revenue, including from taxes and dividends, if oil price declines sharply after Russia walked away from OPEC+ talks.

Putra Business School associate Prof Dr Ahmed Razman Abdul Latiff said crude oil price could further drop on the prospect of a price war between Saudi Arabia and Russia after the latter refused to support supply cuts recommended by OPEC in talks held last week.

The price of Brent oil contract fell sharply by 8.9% or US$4.45 a barrel to close at US$45.54 a barrel (RM188) last Friday with the potential to go down further as traders anticipate a fight for market share among major producers.

The current market price of oil is far different from Putrajaya’s assumption of US$62 per barrel in Budget 2020 and thus poses constraints to the federal government’s budget targets and economic stimulus package launched recently.

“This will definitely affect the government’s initiative to improve the economy via cash injection such as the recent fiscal stimulus package worth RM20 billion.

“If the economy is slowing down, the whole trade balance will be affected and slowing exports will weaken the ringgit against the US dollar,” Ahmed Razman told The Malaysian Reserve (TMR).

He said oil and gas (O&G) companies in Malaysia, particularly Petroliam Nasional Bhd (Petronas), will see a cut in their margins from the weaker price and leave little room for capital expenditure if the government insists on a regular payment of dividends.

“In the long run, this will leave them at a disadvantage for not having additional new oil sites to sustain their production and revenue, due to reduced investment or exploration activities,” he added.

The drop in crude oil prices in the past few weeks led the federal government last Friday to cut prices of petrol at the pump by as much as 21 sen per litre to RM2.19 for RON97 and 19 sen for RON95 to RM1.89.

The price of diesel was cut by 17 sen a litre to RM1.96 under the automatic pricing mechanism.

Meanwhile, the collapse of the OPEC+ talks saw Saudi Arabia kicked off an all-out oil war on Saturday, slashing prices for its crude and making the deepest cuts in prices in at least 20 years on its main grades, in a bid to push as many barrels into the market as possible, Bloomberg reported.

The cuts in monthly pricing by state producer, Saudi Arabian Oil Co, are the first indication of how the Saudis will respond to the breakup of the alliance between OPEC and partners like Russia.

Sunway University Business School economics Prof Dr Yeah Kim Leng said the oil price war is bad for oil exporters, including Malaysia, but will benefit oil-importing countries.

He expects Petronas and other O&G companies will face earnings decline because of the sliding oil prices.

“The sharply lower oil prices will have a negative impact on the ringgit, but the downside pressure will not likely be excessive because of Malaysia’s more diversified exports,” he told TMR.

Areca Capital Sdn Bhd CEO and ED Danny Wong viewed the situation as negative in general.

He said lower oil prices will impact producers with a high breakeven price and impact the support service providers down the value chain.

He added that the lower oil prices, combined with all the uncertainties facing the Malaysian economy, could test the country’s sovereign rating outlook if things were to prolong while the ringgit comes under pressure.

“That said, low oil price and potential weaker ringgit is positive for the manufacturing sector and exports. In the 2015 O&G crisis, our manufacturing was strong to support.

“For the O&G sector, I think big oil majors will be better prepared this time around as not much has been invested into development these few years, but smaller companies will not be able to withstand the fall as they have higher breakeven prices,” he told TMR.

As for Malaysia’s industry players, those that have not restructured will continue to have issues that are hopefully will not be too huge to impact their balance sheet.

StashAway country manager for Malaysia Wong Wai Ken said the acrimony in OPEC+ poses a real threat in the mid-term for oil price as it is unlikely that OPEC and Russia will cooperate.

“We are already seeing this negative effect on Bursa Malaysia with the Bursa Malaysia Energy Index falling 20% year-to-date. This will worsen the outlook for FTSE Bursa Malaysia KLCI which is already down 7% this year due to political uncertainty,” Wong told TMR.

He added that the ringgit — which has been supported by the former prime minister’s statement regarding the stimulus package in response to Covid-19, may experience downward pressure due to the weaker prices.