Oil price decline eases Asia's inflation fears as Opec production cuts disappoint
Oil prices fell again on Friday as voluntary output cuts by Opec+ producers disappointed markets and fears of a spike in inflation eased in Asian economies.
Benchmark Brent crude oil futures were trading at US$82.7 per barrel, down 0.2 per cent in mid-day during Asian trading hours, extending losses of more than 2 per cent on Thursday.
The Organisation of Petroleum Exporting Countries (Opec), along with other oil-producing nations, agreed on Thursday to a voluntary output reduction of 900,000 barrels per day, in addition to extending production cuts of 1.3 million barrels per day.
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The cuts are likely to keep supply-demand tightly balanced, analysts said.
Delegates had earlier discussed as much as 2 million barrels per day of new production cuts, which had been pencilled in by traders. Prices are likely to trade between US$80-85 per barrel, analysts said.
Adding to these forecasts, Jean-Christophe Caffet, group chief economist at Coface, a global credit insurer, said that in their "central scenario, where there is no major escalation involving Iran", oil prices should remain in the US$80-$90 per barrel price range.
"In my view, it would not be in Saudi Arabia's advantage to have very high prices because it would lead to demand destruction," Caffet said.
Range-bound oil prices are welcome news for import-dependent South and Southeast Asian economies, which are facing a double whammy from a slowdown in two of the world's largest economies, the United States and China.
"Inflation in Southeast Asia, like elsewhere in the world, has been steadily retreating over the course of this year. This is driven as much by base effects, the significant easing of supply chain pressures, reduced demand pressure due to a turn in the electronics cycle, and falling commodity prices [including energy]," said Jamus Lim, associate professor of economics at ESSEC Business School Asia-Pacific and a specialist on China and Southeast Asia.
"So while there will of course be some pass-through from reduced oil supply to energy prices and hence inflation, I do not expect this effect to be that pronounced," he said.
Declining prices of fuel and factory goods have been the biggest drivers of consumer-price inflation easing in Asia, according to a Morgan Stanley report released on November 22.
Oil prices soared to eight-year highs in March of last year, following Russia's invasion of Ukraine, which disrupted global supply chains. Prices cooled subsequently, partly due to higher supplies from other countries, as well as discounted supplies by Russia that were snapped up by India and China.
Fears of oil again revisiting last year's peak resurfaced after the start of the Israel-Gaza war in the oil-rich Middle East, but prices have retreated to below a psychological mark of US$100 per barrel amid signs that the conflict will not spread.
South and Southeast Asian nations, however, are still grappling with higher food prices as El Nino - a weather phenomenon that disrupts normal rainfall - has hit the output of their biggest staple, rice.
Morgan Stanley said that sticky food prices are likely to ease from the first quarter of next year as the impact of El Nino is expected to fade. Top rice supplier India, which had instituted an export ban, has granted exemptions to Singapore and resumed some shipments to the Philippines and Malaysia.
Asian central banks are likely to cut bank interest rates from the second quarter of next year because of easing inflation concerns, Morgan Stanley said.
Lower bank rates can potentially accelerate the region's economic recovery by easing up liquidity for Asian enterprises, which have struggled to secure funds ever since the US Federal Reserve started hiking rates last March.
Lim said Southeast Asian nations would continue to take cues from the Fed.
In early November, the Fed announced its decision to hold its key lending rate at a 22-year high of between 5.25 per cent and 5.5 per cent. On Thursday, Fed policymakers signalled that the central bank's interest rate hikes are likely over.
"At the moment, while most financial market participants expect rate cuts next year, the magnitude is likely to be modest - perhaps only by one percentage point, at most, by the end of next year. This may offer some wiggle room for regional central banks to effect rate cuts to goose growth, but not much," Lim said.
Southeast Asia's economy may improve marginally next year, he added.
However, there are signs that oil prices could moderate further amid signs of a crack within Opec, possibly leading to more supplies and lower inflation.
Opec, which accounts for around 40 per cent of the world's oil supplies, had to delay its meeting by several days amid a reported lack of consensus on production plans.
Only a few of the producing countries have detailed their production cuts, an ANZ report noted. "The lack of a published agreement also raises the prospect of some producers not adhering to their voluntary reduction."
African nations have resisted Saudi Arabia's call for output cuts, though a bright spot for the oil group was that South America's largest oil producer, Brazil, has joined its ranks.
"The outcome of the ministerial meeting is a bittersweet victory for Saudi Arabia, the group's kingpin," said Jorge Leon, senior vice-president at Rystad Energy. "The kingdom won the backing of some Opec+ members to contribute to output cuts into next year, but others remain opposed or on the fence.
"The inability to secure a group-wide decision on production cuts does not bode well for the group's unity and cohesion and limits the group's ability to balance the market," he said.
This article originally appeared on the South China Morning Post (SCMP).
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