This article first appeared in The Edge Malaysia Weekly on May 11, 2020 - May 17, 2020

IT came as no surprise that last Monday’s external trade data painted a rather gloomy picture of trade activity, given that the economy came to a near standstill in mid-March when a Movement Control Order (MCO) was implemented in tandem with many other countries worldwide to rein in the spread of the coronavirus.

March exports fell 4.7% from a year ago while imports dipped 2.7% over the same period.

Zeroing in on the oil and gas sector, LNG exports and crude petroleum saw declines in value terms in March. LNG exports bore the brunt of it, falling 13.4% to RM3.4 billion year-on-year while crude petroleum exports declined 4.2% to RM2.3 billion.

The performance was only to be expected as crude oil prices nosedived in early March from US$50 per barrel to about US$20 per barrel by the end of the month.

LNG export volumes also fell 1.5% y-o-y while crude petroleum showed a 2% increase in export volume.

As oil demand is projected to contract this year, how will Malaysia’s oil exports fare?

Many expect to see a lower value of oil exports this year, but reduced export volumes should be anticipated as well.

A report by Maybank Investment Bank Research highlights the worsening outlook for the oil industry amid the excess gap between production and oil demand, which has been affected by declines in global industrial, travel and transportation activities, as close to half of the global population stays home in a bid to limit the spread of Covid-19.

“The resulting effect is that crude oil storage facilities are filling up quickly, with excess crude supply pushing down Brent crude prices, which averaged US$18.7 per barrel in April 2020 in contrast to US$32 per barrel in March 2020 and a recent high of US$67.3 per barrel in December 2019,” the report elaborates.

The Organization of the Petroleum Exporting Countries (Opec) forecast in its Monthly Oil Market Report for April that the demand for oil globally will fall to 92.82 million barrels per day in 2020 from 99.67 mb/d in 2019.

The contraction for the second quarter of 2020 is expected to be around 12 mb/d, Opec says, with April bearing the load of it with a contraction of 20 mb/d.

“Considering the latest developments, and the large uncertainties going forward, downward risks remain significant, suggesting a possibility of further adjustments, especially in the 2Q, should new data and further developments warrant revisions,” Maybank further notes in its report.

Export volume mildly affected in 2015

A look at export trends during the 2014 oil price plunge on the back of a severe glut, could be instructive. At the time, oil prices plummeted from a high of over US$100 per barrel in mid-2014 to a low of about US$30 by end-2015.

LNG exports by volume fell 1.3% y-o-y in 2015 to 25.13 million tonnes from 25.45 million tonnes in 2014. Crude petroleum exports, on the other hand, grew 20% y-o-y to 15.6 million tonnes in 2015 from 12.9 million tonnes in 2014.

On a month-on-month basis, there was a blip in July 2014 as exports of both LNG and crude petroleum plunged sharply, down 22.6% y-o-y to 1.64 million tonnes for LNG and 18.8% y-o-y to 927,000 tonnes for crude petroleum.

Export volume for both commodities rebounded after July 2014.

In value terms, crude petroleum’s y-o-y export value saw a contraction from February to December 2015 while LNG’s y-o-y export value shrank for the whole year.

The severity of the Covid-19 pandemic is a different ball game, though.

The Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-economic Research Centre executive director Lee Heng Guie sees exports of crude oil and LNG remaining weak or even declining for the second consecutive year in 2020, following a contraction of 12.1% in LNG exports and 8% in crude petroleum exports in 2019.

The two components make up about 7% of total exports.

“Not only will there be continued declines in export volume of both minerals, but we expect a sharp decline and volatile shifts in crude oil and LNG prices throughout 2020 and estimate Brent crude oil prices to average US$25 to US$35 per barrel in 2020 (US$68.58 per barrel in 2019) and RM1,100 to RM1,200 per tonne for LNG (RM1,598 per tonne in 2019),” Lee says.

Malaysia has agreed to cut oil production by 136,000 barrels per day in May and June, as part of the 9.7 million barrels per day supply cut by Opec+ to stabilise plunging global oil prices.

Although UOB economist Julia Goh agrees that the prospects for oil exports are weak amid lower production, weaker oil demand and a price slump, she observes that Malaysia’s exports are diversified, and that LNG and crude petroleum account for 7% of total exports relative to the electrical and electronics sector’s 33% share.

“What’s important to the current account is the net trade from these commodities. It is worth noting that Malaysia’s trade surplus from LNG is larger than crude oil,” she highlights.

Fiscal position concerns

A common concern with plunging oil prices is its impact on government coffers. Any decline in crude oil prices and export revenue will significantly dampen oil-related revenue contribution, and is reflected in the petroleum income tax collection for the year.

Lee estimates a potential loss of oil-related revenue and petroleum royalty amounting to RM16.5 billion based on an average oil price of US$35 per barrel.

Oil revenue typically contributes less than 20% to overall revenue, says Goh.

“Oil sensitivity is that every US$1 change in Brent oil price would affect government revenue by RM300 million. The oil revenue losses can be offset by lower fuel subsidies and further shortfalls covered by restructuring of expenditure, higher dividends and domestic borrowings.

“Structurally, the economy has rebalanced away from the energy sector over the years, thus hence the reliance on oil is less,” she explains.

She adds, however, that there would be an impact on Petronas’ earnings that could affect its dividends to the government.

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