KUALA LUMPUR: The ripple effects of higher oil prices on Asia Pacific (APAC) economies and globally are expected to be felt if the current development of Middle East tension is not defused soon, said a research house.
Moody’s Analytics, in its commentary note, said that the escalation of tensions in the Middle East over the weekend poses a significant threat to APAC economies, with the key risk coming from higher oil prices.
It said that last Friday (April 12), ahead of Iran’s attack on Israel, West Texas Intermediate crude was trading between US$85 (US$1=RM4.7715) and US$90 per barrel; of that, an estimated US$5 was a risk premium in anticipation of the attack.
“Now that the attack has happened, we expect oil prices to add another US$5 per barrel to the risk premium, pushing oil to the US$90 to US$95 per barrel range. From here, there are two possible scenarios. The most likely is a measured and restrained response from Israel that de-escalates tensions, in line with pressure from the Biden administration in the United States and the wider global community.
“That would see the US$10 per barrel risk premium fade over the next few weeks. The second, and far more damaging scenario would see an escalation in the conflict as Israel forcefully responds to the attack. Were that to occur, oil prices could jump to more than US$100 per barrel,” said the research house.
It added that higher oil prices could threaten to derail the region’s already choppy progress on inflation.
Moody’s Analytics said as most APAC economies are net oil importers, it could leave them vulnerable to global oil spikes with impacts varying across countries. Still, broadly there are three main challenges from rising oil prices.
The challenges are higher prices could add inflation through higher energy and fuel costs as well as adding to the cost of production and overall transport costs, lifting prices on everything from food to flip-flops.
“The risk of higher food costs, via higher fertiliser, transport and seed costs is especially worrisome because, in much of Asia, it is stubbornly high food price inflation that keeps top-line consumer price indexes from retreating to central bank target ranges.
“Also, higher oil prices can push up inflation expectations, making the job of central banks even harder. All that pushes back the prospect of rate cuts, particularly if the US Federal Reserve delays monetary easing. Depending on how long prices stay elevated, rate hikes could even come back into play,” said Moody’s Analytics.
It also said higher oil prices come at a particularly bad time for the APAC economies, especially with the path of disinflation has already stalled in some countries.
“Higher food and energy prices, as well as a handful of government initiatives, are keeping pressure on prices in Indonesia, South Korea, Singapore, Vietnam and Malaysia.
“Adding in an oil price shock would exacerbate these challenges severalfold. Even the region’s net oil exporters are not necessarily net winners. Although Malaysia and Brunei could get a revenue boost as oil prices rise, much of this could get washed away by weaker global demand as resurgent inflation globally sends households back into hiding,” the research house added.
Meanwhile, Rystad Energy, in its latest oil market update, said it is still unknown how the Organisation of the Petroleum Exporting Countries and other oil-producing countries (OPEC+) would react to the latest development of the Middle East crisis.
The Norway-based independent energy research and business intelligence company said that increasing geopolitical tension has undoubtedly complicated the job of OPEC+ to carefully manage the oil market.
“Currently, the group has extended its voluntary production cuts until the end of June. The group will most likely decide whether to unwind those cuts at the June 2 Ministerial Meeting.
“Still, if the geopolitical situation in the region escalates further, the group could hold an extraordinary meeting in the coming weeks. With almost six million barrels per day (bpd) of spare capacity, the group could easily increase production to limit upside price pressure if the conflict escalates,” it said.
Among others, Rystad Energy said sustained higher oil prices would fuel inflation again in the West and prompt central banks to postpone any monetary normalisation efforts, leading to weaker global economic growth.
Apart from that, it noted that today’s world is different from that of 1973 when an oil embargo was imposed, particularly with geopolitical alliances different now and OPEC would not want to repeat mistakes that prompted a global energy crisis with long-lasting implications.
“In addition, OPEC has always emphasised, and proved, that the organisation is not a political entity and that its role is solely to coordinate and unify the petroleum policies of its member countries.
“It is also relevant to highlight the Gulf states’ interest in regional de-escalation has multiple motivations,” said Rystad Energy.
Yesterday, Prime Minister Datuk Seri Anwar Ibrahim, who is also the Finance Minister, said the government is closely monitoring the developments in the Middle East conflict and the financial market situation, including the potential impact on Malaysia.
He said the government will act wisely to strengthen the country’s economic and financial stability.
