Nearly
a month after one of the crude oil futures contracts fell below zero, it has rebounded. Now
it is nearly USD 33 a barrel.
Oil
prices fell with fears of a shortage in global oil storage capacity. The U.S.
Energy Information Administration (EIA) is of the view that the rate of
inventory builds peaked in April, and as oil demand begins to return and oil
supply reduces, price will begin to rebound. According to EIA, global oil
demand is expected to exceed supply beginning in the second half of 2020. Prices
could then steadily rise.
The EIA forecasts that Brent crude oil
prices will rise to an average of USD32/b during the second half of 2020. The average
Brent oil price will be USD48/b in 2021, reaching USD54/b by the end of the
year. This price forecast reflects an expected global oil consumption of 97.4
million barrel per day during the second half of 2020, along with relatively
high compliance of announced OPEC+ production cuts, both of which are
uncertain. Also, the response of U.S. shale industry to the current low prices
will affect the oil price path in the coming quarters.
Considering weakening
oil prices, the Ringgit
could be weaker in the short term.
The
above graph shows the regression plot of Brent Oil Price vs. Ringgit with
monthly data retrieved from May 2010 to April 2020. The scattered blue dots
plot out the historical exchange rate (USD/MYR) corresponding to respective
Brent Oil Price. The fitted regression line (the blue line) on the other hand
represents the relationship between exchange rate and oil price. In short, the
graph shows that the Ringgit weakened when oil price declined.
Based
on our regression model (R2 = 0.77), with average USD32/b Brent crude price
in second half of 2020 as forecasted by EIA, Ringgit could slip to 4.4312
against the USD. But with oil price reaching USD48/b on average in 2021, the
Ringgit could hit 4.1656 against the USD.
“The
ringgit is more dependent on local conditions. It will likely weaken in the
short term because of the knee-jerk sentiment, but should recover by the midterm,”
said Alliance Bank chief economist Manokaran Mottain. His projections (22 April
2020) are for the ringgit to hit the RM4.30 to RM4.35 mark by year end.
Our
forecast is based on a single dependent variable model where oil price change
is the only explanatory variable for any exchange rate change. However
according to Manokaran, the ringgit used to track oil prices very closely but not
in recent weeks. He pointed out that another factor providing some stability
for the ringgit is the foreign fund flow into the bond market. Carry trades are
happening out there with foreign fund managers taking advantage of Malaysia’s
interest rates. Thus, Manokaran expects the ringgit to be relatively stable due
to the influence of the bond market. What do you think?
Reference:
1. Short-Term Energy Outlook, 12 May 2020,
EIA
2.
Tom
Kool, The Relentless Oil Price Rally, 15 May 2020
3. Ringgit could face weakness before
picking up, 22 April 2020, The Star
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