Where Will the Ringgit Be If Oil Hits $80?

 

Oil prices rose to the highest in more than two years after a top U.S. diplomat said that even if the United States were to reach a nuclear deal with Iran, hundreds of U.S. sanctions on Tehran would remain in place. That could mean additional Iranian oil supply would not be re-introduced into the market soon (Reuters, 9 Jun 2021).

Oil price appears to have stabilized in the upper 60s with Brent price finding support around $67 per barrel while WTI had support at around $65 per barrel. Brent crude closed at US$74.39 a barrel on 16 June, the highest it has settled since May 2019. U.S. West Texas Intermediate oil settled at $72.15 a barrel on 16 June, highest since October 2018.

The surges were due to expectations of demand returning with some countries vaccinated against COVID-19. Restraint on supply by the Organization of the Petroleum Exporting Countries and allies had also buttressed prices.

U.S. crude oil production is expected to fall by 230,000 barrels per day (bpd) in 2021 to 11.08 million bpd, the U.S. Energy Information Administration (EIA) said. This is a smaller decline than it forecasted last month. Wall Street continues to be largely bullish on the oil sector, with some analysts saying that $80 per barrel in the summer is now in the crosshairs (Alex Kimani, 8 Jun 2021).

Francisco Blanch, global commodities and derivatives strategist at Bank of America thinks we could see $100 per barrel again in the next three years. “Part of it is the fact that we have OPEC kind of holding all the cards, and the market is not particularly price responsive on the supply side and there is a lot of pent-up demand ... We also have a lot of inflation everywhere. Oil has been lagging the rise in prices across the economy,” Blanch said.

 

What happens to the Ringgit if oil price continues to rise?

The above graph shows the regression plot of Brent Oil Price vs. Ringgit with monthly data retrieved from July 2011 to June 2021. The scattered blue dots plot out the historical exchange rate (USD/MYR) corresponding to respective Brent Oil Price. The fitted regression line (the orange line) on the other hand represents the relationship between exchange rate and oil price. In short, the graph shows that the Ringgit strengthens when oil price rise.

Based on our regression model (R² = 0.81), if Brent Oil Price reaches $80 a barrel this summer (as forecasted by a Wall Street analyst), Ringgit could reach 3.6821 against the USD. With Brent Oil Price at $100 per barrel, Ringgit could hit 3.3565 against the USD! The last time we had our Ringgit below USD/MYR 4.0000 was in 2018.

 

 

Note: Our forecast is based on a single dependent variable model where oil price change is the only explanatory variable for any exchange rate change.

 

Reference:

1.     Oil price rises as Iranian supply not seen returning soon, 9 Jun 2021, Reuters

2.     Alex Kimani, Oil Could Reach $80 This Summer, But There’s A Catch, 8 Jun 2021, oilprice.com