Oil Price War Ignites Sell-Off
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10 March 2020
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What happened?

Oil prices plunged by almost 30% after Organization of the Petroleum Exporting Countries (OPEC) and its allies failed to strike a deal regarding production cuts. This culminated in Saudi Arabia, the world’s largest oil exporter ramping-up production and slashing prices, leading to fears of an all-out price war.

Saudi Arabia’s price cut followed a breakdown of talks in Vienna last week, where OPEC members had recommended additional production cuts of 1.5 million barrels per day starting in April and extending quotas until the end of the year.

But OPEC ally Russia had rejected the additional cuts when the 14-member cartel and its allies, collectively known as OPEC+ met last week. The meeting subsequently concluded with no directive about the production quotas that are currently in place, but are set to expire by the end of March.

As an act of retaliation, Saudi Arabia had announced over the weekend massive discounts to its official selling prices for April. The kingdom is reportedly also set to increase its production above 12 million barrel per day. Oil prices have already moved sharply lower this year as the coronavirus outbreak has led to softer demand for crude. A potential supply glut could pressure prices downwards further.

How did markets react?

Oil & gas related stocks took a hit falling by over 20%-30%, when markets opened. Banks with large debt exposure to the oil & gas sector may face additional strain as companies within the industry are unable to service their borrowings. Smaller O&G companies particularly with weaker balance sheets may face credit stress and struggle to repay interest.

We view the recent moves in oil price largely as a result of a self-induced supply shock, rather than a sudden collapse of demand which is more detrimental to the economy. Viewed through a wider geopolitical lens, the move by Russia is also seen as strategy to weaken US shale players and hurt its economy, beyond just gaining market share. We expect further pain ahead for oil markets, before any OPEC+ countries can be brought back to the negotiation table.

What about impact to Malaysia?

As a net oil exporter, Malaysia may see its oil revenue depleting and budget deficit widen with already limited fiscal room to manoeuvre. According to estimates, every $10 change in oil prices would lead to a loss of over RM7 billion in government revenue.

If oil price continues to weaken, state-owned oil major Petronas may move to cut upstream spending and capex activities which would have spill-over effects to the rest of the industry. Service providers may see margins narrow as contracts are renegotiated and maintenance players prolong schedules due to a lack of activity. The local currency which has held up well so far could weaken if the situation prolongs. The Ringgit weakened as much as 4.50 against the greenback at the height of the 2014 oil crisis when oil prices fell below US$ 28 per barrel.

How are our portfolios positioned?

On portfolio positioning, we remain prudent and would continue to stay defensive as markets tend to overreact in the short-term due to knee-jerk selling. Capital protection would take precedence as we await for further clarity before we deploy back into markets again.

What should investors do?

Investors may be tempted to react impulsively by taking profit as markets have sold-down fiercely due to Covid-19 fears and the recent plunge in oil prices. But, it is extremely difficult to time market conditions and if indeed the market has reached the tail end of the bull cycle. Economic forecasts have certainly softened due to strict containment measures taken as well as supply chain disruption caused by the coronavirus.

However, It is crucial that investors stick to their asset allocation plan and not be swayed by market volatility. Once Covid-19 recedes, we believe the global economy will bounce back as months of pent-up demand flows into the economy. Lower oil prices may even bode well for emerging markets over time. Ultimately, markets will find its equilibrium and normalise by finding new levels.

Investors who remain disciplined in their approach by investing consistently and stick to their long-term asset allocation would eventually reap the benefits and fare better overall.

Disclaimer
This article has been prepared by Affin Hwang Asset Management Berhad (hereinafter referred to as “Affin Hwang AM”) specific for its use, a specific target audience, and for discussion purposes only. All information contained within this presentation belongs to Affin Hwang AM and may not be copied, distributed or otherwise disseminated in whole or in part without written consent of Affin Hwang AM.

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TENG CHEE WAI

Managing Director
Teng Chee Wai is the founder of Affin Hwang Asset Management Berhad (Affin Hwang AM). Over the past decade, he has built the Company to be the fastest growing and only independent investment management house in Malaysia’s top three, with an excess of RM47 billion in assets under management as at 31 December 2018.​

​In his capacity as Managing Director / Executive Director, Teng manages the overall business and strategic direction as well as the management of the investment team. His hands-on approach sees him actively involved in investments, product development and marketing. Teng’s critical leadership and regular participation in reviewing and assessing strategies and performance has been pivotal in allowing the Company to successfully navigate the economically turbulent decade.

Teng’s investment management experience spans more than 20 years, and his key area of expertise is in managing absolute return mandates for insurance assets and investment-linked funds in both Singapore and Malaysia. Prior to his current appointments, he was the Assistant General Manager (Investment) of Overseas Assurance Corporation (OAC) and was responsible for the investment function of the Group Overseas Assurance Corporation Ltd.​

​Teng began his career in the financial industry as an Investment Manager with NTUC Income, Singapore. He is a Bachelor of Science graduate from the National University of Singapore and has a Post-Graduate Diploma in Actuarial Studies from City University in London.
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