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Crude
palm oil (CPO) futures prices on Bursa Malaysia Derivatives closed lower
yesterday dampened by weakness in crude oil prices and expectation of higher
palm oil inventory for October. Phillip Futures Sdn Bhd Derivative Product
Specialist David Ng said traders remained cautious ahead of the Malaysian Palm
Oil Board’s data to be released next week on the stock level for October.
At
close, November 2014 fell RM27 to RM2,192 a tonne, December 2014 lost RM27 to
RM2,201 a tonne, January 2015 was down RM26 to RM2,196 a tonne and February
2015 declined RM22 to RM2,206 a tonne. Volume rose to 59,182 lots from
Thursday's 53,064 lots while open interest widened to 289,165 contracts from 278,651
contracts yesterday. On the physical market, November South eased RM30 to
RM2,230 a tonne.
The
traditional oil and gas producing countries are riding on the hope that the
shale oil and gas phenomenon is only temporary, that the United States will not
be able to sustain its production of oil and gas as the price declines and
hence a floor price will be discovered sooner than people think. This is based
on the notion that the cost of producing shale oil and gas – through horizontal
drilling and hydraulic fracturing – is more expensive than the cost of
extracting conventional oil found in the Middle East and resource-rich Russia.
But
latest reports indicate that the cost of producing shale oil and gas in the
United States has dropped to an average of US$57 per barrel from US$70 per
barrel in the middle of last year. And the cost could likely go down further as
more shale oil and gas activities pick up because the producers tend to enjoy
economies of scale and become more familiar with the production process. This
year alone some 18,000 horizontal wells are to be drilled, according to a
report.
Considering
the circumstances, Malaysia needs to re-think its subsidy rationalisation programme
for petrol and diesel.The Government is looking at ways on how to better
administer the subsidy that is given to consumers. At the moment the subsidy is
about 12 sen per litre, as of October this year. This is based on the price of
RON95 at RM2.30 per litre. In a reply in parliament last week, Deputy Finance
Minister Datuk Ahmad Maslan said that if the global crude oil price was between
US$75 and US$80 per barrel, there would no longer be any subsidy on petrol. Effectively,
the trigger for petrol at the pump without subsidy is when crude oil trades at
between US$75 and US$80 per barrel. This is not far from where the global
prices are today.
In
the next few months, indications are that the US dollar is expected to rise
gradually, indicating further pressure on commodities, including crude oil.In
fact, the US dollar is already appreciating against all major currencies. In
the last one month, it has gone up by more than 2.6% against the ringgit. The
rise of the US dollar is helped by expectations of the interest rates there
rising, due to the end of the quantitative easing programme last month.
A sustained drop in crude oil prices
could have an adverse impact on the Malaysian economy, as Malaysia was still a
net exporter of oil, sustained low prices may likely pose adverse impacts on
the overall economy. The net effect of a sustained fall in crude oil prices
would likely be more disadvantageous to the revenue front rather than fuel
subsidy savings, given that the oil and gas (O&G) sector revenue
contribution to GDP ratio was 6.6% versus the fuel subsidy to GDP ratio of 2.6%
in 2013. Currently, Budget 2015’s projection is hinged at an average price of
US$100 per barrel for 2015. However, crude oil prices averaged at a low of US$88
per barrel in October, after hitting a 4-year low of US$83 per barrel on 15
October. Every sustained US$10 per barrel drop in crude oil prices would shave
off up to RM4 billion of budget revenue and savings of RM2 billion from fuel
subsidy expenditure. If prices were to average at US$90 per barrel for the next
12-month period, this would push the fiscal deficit to 3.2% in 2015 versus the
targeted level of 3%. While inflation in the short term is likely to be muted
as fuel prices are administered through government fuel subsidy provision, a
sustained fall in crude oil prices poses downside risk to potential GDP growth
in 2015.
Everything
points to a period of lower oil prices. The low crude oil price could have
negative impacts on businesses and consumers which the subsidiaries might be
potentially removed by the government if the crude oil price continue to fall
down from the expectation of government budget.
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