Crude oil retreats after surging most in 30 yrs on demand concerns

SINGAPORE (ICIS)–Crude oil prices retreated on Tuesday after nearly a 15% spike overnight, the sharpest oil market surge in 30 years triggered by attacks on Saudi Arabia’s oil facilities on 14 September.

Concerns that the recent price surge will impact consumer spending and further burden import bills of developing economies, particularly in Asia, weighed on the market.

Investors are currently weighing their options amid worries that a sustained increase in crude oil prices could tip the global economy – already heavily weighed down by the trade war between the US and China – into a recession.

At 03:18 GMT, Brent was down by 89 cents at $68.17/bbl while NYMEX Light Sweet crude was 94 cents lower at $61.96/bbl.

The drone attacks on Saudi Arabia’s main oil facilities over the weekend is estimated to have taken some 5.7m bbl/day, or 5% of global supply, off the market.

Oil markets initially reacted by lifting Brent crude prices to a high of $71.95/bbl early on 16 September, a 19% increase from the previous session, before easing back below $70/bbl.

“On one hand, OPEC and Russia have some room to increase supply, and oil inventories can also be tapped to fill the temporary void from the lost Saudi production. If this truly is a temporary, one-off disruption, then oil prices could stabilise near current levels,” Japanese brokerage Nomura said in a research note.

“On the other hand, if there is strong retaliation or more drone attacks, the situation could spiral out of control; in the worst case, it could escalate into a full-blown crisis in the Middle East and lead to larger and more permanent oil supply declines,” it added.

In Asia, the economies exposed heavily to higher crude prices are major oil importers India, Indonesia, Thailand and the Philippines.

“India is amongst few in the region most exposed to higher oil prices due to its rising reliance on energy imports and sizeable oil trade deficits,” Singapore’s DBS Bank said.

High reliance on imported crude to meet 83% of its domestic oil demand leaves India vulnerable to movements in global oil prices. Saudi Arabia is India’s second-largest supplier of crude and cooking gas.

Every $1 dollar increase in Brent prices adds around $2bn to India’s oil imports bill. A 10% rise in crude prices widens India’s current account deficit by 0.4-0.5% of GDP, according to DBS.

“[The] Extent of oil gains hinges on how long the outage lasts. It remains to be seen if Monday’s price surge sustains,” DBS said.

In China, upstream industries will be hit relatively harder than consumers on the back of weakening demand and a worsening trade war with the US.

Given that oil accounts for 10% of China’s total imports, a 20% rise in oil prices will boost the country’s imports by about $43bn. The current account balance as a share of GDP currently standing at 1.34% of GDP will likely fall to 1% in H2 2019 and 0.5% in 2020, DBS said.

As a result, growth of foreign reserve will likely shrink, exerting downward pressure on the Chinese yuan (CNY), according to DBS.

In contrast, the sharp rise in oil prices could have a positive effect on the Malaysian economy in the long run as it is a large net exporter of liquefied natural gas (LNG), the price of which is closely linked to oil although with a lag of around four to five months.

Focus article by Nurluqman Suratman

Photo: A handout photo made available by the US Government and DigitalGlobe shows the aftermath of an alleged drone attack on the Abqaiq oil field in eastern Saudi Arabia, 15 September 2019. (US GOVERNMENT/DIGITALGLOBE HANDOUT/EPA-EFE/Shutterstock)

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