Energy bear exposes need for reform

The economy needs structural reform to attract fresh investments and create higher-value products and services


WHAT a week it has been for the energy market. Crude oil prices are recovering after a historic two-day plunge early in the trading week.

The West Texas Intermediate (WTI) futures contract for June delivery was trading at US$15 (RM65.40) a barrel at the time of writing, with subsequent month contracts in contango with prices higher further out into the year.

The WTI futures contract for May delivery crashed below zero into the negative territory to hit a low of -US$40 a barrel in late trading on Monday on the New York Mercantile Exchange, as traders washout the contract due to concerns storage facilities at Cushing in Oklahoma were fast filling up, due partly to the demand destruction caused by shutdowns in force to combat the Covid-19 pandemic across the world.

The volatility in price of the world’s most actively traded energy complex contract spilled into Tuesday before the May delivery contract expired at US$10 a barrel, as most contract holders, more likely speculators like the energy-based exchange-traded funds, were forced to cash settle at a substantial losses instead of having to take physical delivery of the underlying product.

The black swan event could repeat itself if the demand destruction and sustained supply levels are not addressed in the next few weeks as the WTI June delivery contract will mature soon enough.

As consumers welcome cheaper prices at the pump, a lot of local companies in the industry’s value chain could possibly go under and thus lead to job losses as investments are delayed or become non-viable.

The country’s oil palm and rubber industries face the prospects of pricing pressures as there’s no real commercial need to produce biodiesel and thus lead to weaker latex and rubber product prices.

Putrajaya is also dependent on the sector for a sizeable portion of its revenue. With both crude oil and natural gas prices trading at more than a decade low due to bearish demand-supply fundamentals, the amount of royalties and taxes the government stands to receive from the sector is at risk, and funding the fiscal stimulus measures and maintaining fiscal discipline to hold the deficit at 4% of GDP will become far more complex.

As it stands, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz has stated the government will reprioritise expenditures as the RM260 billion fiscal stimulus package assumes an average crude oil price of US$25-US$35 a barrel.

With businesses asking for various tax reliefs to ride out the current period, the whole episode again raises the need for the government to further diversify its income sources and fiscal prudence.

The “noise” calling for the reintroduction of the Goods and Services Tax, which was zero-rated by the previous administration, is probably not the right solution for the present time.

The economy needs structural reform to attract fresh investments and create higher-value products and services, as well as higher-paying jobs.

The impact of the pandemic on the world is yet to be revealed in full. So far, it’s generally been negative, but the China pushback could see a further realignment of the major supply chains into the region and countries like Malaysia.

So, the country needs to prepare to take advantage of such opportunities despite concerns about the perceived lack of political will and strength in the country.

  • Bhupinder Singh is the corporate desk editor of The Malaysian Reserve.