(Channel News Asia) Oil Price Gain Ground, US$85-Barrel. Best Time to Reallocate Subsidy?

12/12/2018

Oil prices gained ground on Monday (Nov 10), climbing for a second straight session, after hitting a four-year low last week. Brent Crude is now trading around US$84 (S$108) per barrel.

Analysts have said oil prices could continue to trade sideways in the coming weeks - generating savings for the general public.

While lower global oil prices mean cheaper petrol for one's car, given the long list of by-products derived from crude oil, consumers could save more than they think.

SAVINGS FOR PEOPLE AND COMPANIES

Mr Barnabas Gan, an economist for Treasury Research & Strategy at OCBC Bank, said crude oil is an ingredient in many everyday commodities, including rubber and plastic.

"So cheaper crude oil will necessarily translate to cheaper petroleum, cheaper petrol and cheaper everyday commodities. This lower price that they spend would mean that they have higher disposable income in spending on other goods and services,” Mr Gan said

The transportation sector is one sector that is expected to reap benefits, with savings on fuel costs for logistics firm and airlines.

IHS Energy noted that automakers may see some gains as well, as the lower pump prices could persuade consumers to buy larger "gas-guzzlers" cars which tend to have a higher profit margin. However, some businesses could lose out. They include manufacturers of equipment that service the oil sector, as the sector cuts back on investment activities due to the low oil prices.

Mr Christian Schmollinger, senior managing editor for Oil Markets at Platts, said: "A lot of airlines will hedge a certain portion of their jet fuel, they will have a fix price that they will pay for a while, right now the spot price is lower.

"But the hedge price that they are paying for the fuel is probably higher. They will see some benefit, but it will have to work through the hedges that they have in place. I think if prices stay the same at these levels, you may see fares coming off a little bit and certainly lower cost for the airlines.”

GEOPOLITICAL RISKS, WEAK DEMAND

Geopolitical risks in the Middle East and tensions between Russia and Ukraine have weighed on oil prices in recent months.

"There are still a lot of geopolitical risks out there, ISIS is still out in Iraq, Libyan production is going to be quite volatile; if it gets cut off due to political fighting in the country, we could see oil prices go back up by ten dollars or more, so we are entering a rather volatile period," said Victor Shum, vice president of Consulting at IHS Energy

Meanwhile, demand growth for oil has also been weak.

Mr Schmollinger noted: "The developed economies in the world, Japan, Europe, these oil-consuming countries which have traditionally been big consumers, are starting to slow down and that has taken a lot of the demand out of the system.

"At the same time, Chinese demand - which has been a big engine for oil demand growth - has been slowing down as well. And the US shale revolution has put a lot of supply in the market."

One key factor that is also suppressing prices is healthy oil inventory and production in the US.

Analysts expect the Organization of the Petroleum Exporting Countries (OPEC) to discuss the changing fundamentals in the global oil market when they meet in Vienna later this month, but they do not see OPEC cutting production to shore up oil prices or ease the supply glut.

NORTHERN HEMISPHERE WINTER COULD BRING OIL PRICES UP

While market watchers expect oil prices to remain depressed in the short term, they said that looking beyond that, there may be some upside.

"Towards the end of the year, we are going to be in a peak demand season, this is the Northern Hemisphere winter season. And if we get a cold winter, on top of some supply disruption in Iraq, Libya or elsewhere, we could see oil prices rise sharply, but we can count on some volatility in the market and likely towards the end of the year, we are going to see a boost in pricing from a higher seasonal demand,” said Mr Shum.

IHS said Brent prices could come in around US$85 per barrel by year-end.

Anticipating a pick up in global sentiment and continued economic recovery in the US, OCBC said demand for oil next year could grow 3 to 4 per cent, compared to the 2 per cent growth expected for 2014.

Its estimates are US$95 per barrel for Brent and US$90 per barrel for the West Texas Intermediate in 2015.

JejakParlemen

Berita Terkait

Kategori Berita

(Channel News Asia) Oil Price Gain Ground, US$85-Barrel. Best Time to Reallocate Subsidy?