CGS-CIMB: Ringgit typically strengthens with higher crude oil prices, converse is also true

CGS-CIMB: Ringgit typically strengthens with higher crude oil prices, converse is also true
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KUALA LUMPUR (March 9): CGS-CIMB Securities Sdn Bhd said today the ringgit typically strengthens with high crude oil prices and that the converse is also true where the Malaysian currency had been observed to weaken during periods of low Brent crude oil prices as the nation is a net oil and gas exporter.

From a stock market viewpoint, CGS-CIMB analysts Ivy Ng Lee Fang, Michelle Chia and Nagulan Ravi wrote in a note today that historically, the research firm had found a positive correlation between the FBM KLCI and Brent crude oil prices, which the firm suspected could be due partly to the fact that Malaysia is a net oil and gas exporter.

"Big-cap companies that are beneficiaries of higher crude oil prices under our coverage with 'add' calls are Petronas Chemicals Group Bhd (higher petrochemical prices) and Petronas Dagangan Bhd (inventory gains). Other potential indirect beneficiaries are oil and gas names (Sapura Energy Bhd, Bumi Armada Bhd, Velesto Energy Bhd, Yinson Holdings Bhd and Dialog Group Bhd) and palm oil players (IOI Corp Bhd, Kuala Lumpur Kepong Bhd [KLK], Hap Seng Plantations Holdings Bhd, Ta Ann Holdings Bhd and Genting Plantations Bhd) due to improved economic viability for biodiesel, which could potentially lead the Indonesian government to lower export levies. 

"The higher crude oil price is a potential positive for airlines in the near term as it lowers their potential fuel derivative losses. 

"However, higher oil prices could be negative for the shipping, manufacturing, auto and consumer sectors due to higher transport and fuel costs,” they said.

The analysts said CGS-CIMB kept its 2021 KLCI target at 1,759 points as the research firm evaluated the potential impact of higher crude oil prices at US$70 (RM288.82) a barrel on Malaysia’s fiscal position and the broader market.

At 11.09am today, the 30-stock KLCI was 10.41 points or 0.65% higher at 1,622.22. 

At the time of writing, the ringgit had weakened to 4.1248 against the US dollar despite the recent rise in global crude oil prices.

Globally, it was reported that oil prices rose today on expectations of a recovery in the global economy after US Senate approved a US$1.9 trillion stimulus bill and on a likely drawdown in the US crude oil inventory.

It was reported that a stronger US dollar and receding fears of oil supply disruption from Saudi Arabia after an attack on its oil facilities, however, capped oil price gains.

"Brent crude futures for May had risen by 32 cents, or 0.5%, to US$68.56 a barrel by 0125 GMT, while US West Texas Intermediate (WTI) crude for April had risen 19 cents, or 0.3%, to US$65.24.

"On Monday, the Brent crude oil price rose above US$70 a barrel after Yemen's Houthi forces fired drones and missiles at the heart of the Saudi oil industry, including a Saudi Aramco facility at Ras Tanura vital to petroleum exports,” Reuters reported today.

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Chong Jin Hun