Broader market decline weighs on crude oil price recovery

OPEC+ countries are committed to cutting their supplies to help in sustaining oil prices, at least in the near term, says analyst

By ASILA JALIL / Pic BLOOMBERG

CRUDE oil price recovery in the long term is expected to be weighed down by tepid global consumption and weak retail sentiment.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said crude oil is vulnerable to a short-term pullback that could extend by as much as 5%.

“Notably, oil did not rally over-night after official crude inventories fell by more than expected. In the medium to long term though, as the global recovery accelerates, the outlook for oil is positive,” he told The Malaysian Reserve (TMR) recently.

He noted that short-term moves in oil prices have almost no effect on the Malaysian economy, unlike longer-term moves.

The issues faced by the country at the moment are rooted in the domestic economy, which is suffering from a pandemic-induced drop in consumption, he said.

Halley added that the Chinese New Year holidays across the Asian region will have an impact on trading volumes and volatility this week.

“The US dollar/ringgit trade is likely to continue ranging between 4.00 and 4.10, in line with other regional currencies, although I expect the ringgit to appreciate in 2021 as a whole,” he said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told TMR that the volatility in crude oil price remains, but is well-supported by the decline in oil inventory since December last year.

“OPEC+ countries are also committed to cutting their supplies. So, that really helps in sustaining oil prices, at least in the near term,” he said.

The oil price rally was largely due to the fall in US crude inventories by 6.6 million barrels last week to 469 million barrels.

Mohd Afzanizam said the rally was also driven by the vaccination programmes globally, followed by the US$1.9 trillion (RM7.68 trillion) stimulus package which the US Congress is expected to pass soon.

“So, there is some appetite for risk as global growth is expected to be better this year, which should translate, at some point, to an increase in demand for crude.

“Given the close relationship between the ringgit and oil, it would lead to the dollar-ringgit to appreciate or at least to remain steady in the near term,” he added.

In a note recently AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes stated that the oil rally is “taking a breather” after hitting new 12-month highs recently, with Brent priced at over US$61 per barrel suggesting profit-taking set in.

“Despite finding support from the large draw in the US crude stockpiles with excess inventories almost entirely gone now just 26 million barrels, 2% higher than the same point last year, oil prices could not hold into its gains.

“This is possibly due to the expectation that Saudi Arabia could roll back their unilateral February or March production cuts and that OPEC could signal more production coming back online at the March meeting, given the sizzling recovery in oil prices,” he said last Thursday.