As the price of oil fell to its lowest point in almost two decades, producers in Southeast Asia were hit hard and some of ASEAN’s biggest economies are reeling.
By John Pennington
As the price of oil has plummeted to its lowest point since 2002, some of Southeast Asia’s biggest economies are feeling the pressure. A price war between Russia and Saudi Arabia started to drive prices down earlier this year. Then the COVID-19 outbreak sent it spiralling.
The pandemic’s spread has seen flights grounded and people urged to stay at home, reducing demand for oil. As a result, prices fell to around US$20 per barrel.
Source: Business Insider
Oversupply issues hurt Brunei
Two-thirds of Brunei’s gross domestic product comes from oil and gas, and it now has an oversupply issue. As global demand disappears, producers are refining oil that nobody wants to pay for. In the US, suppliers had to pay people to take oil off their hands as the WTI crude oil index went negative.
Brunei remains optimistic that it will sell its oil but cannot yet to say to whom or for how much. It has yet to follow Organisation of the Petroleum Exporting Countries (OPEC) members by cutting down on production.
“Production will be continued in Brunei and I’ve had a discussion with Brunei Shell Petroleum Co Sdn Bhd (BSP) on this matter as well, and this is the time when you really need to make sure that you always have a diversified portfolio of buyers,” confirmed Finance and Economy Minister Dato Seri Setia Dr. Awang Haji Mohd Amin Liew bin Abdullah.
Other countries will lose vast sums of money
Elsewhere in the region, Malaysia, Indonesia, Singapore, Thailand and Vietnam also stand to lose out. Indonesia is Southeast Asia’s largest oil producer and its oil market was on its way to contracting for a fourth straight year before the crisis. Output is declining as its major oil fields begin to run dry.
Malaysia will lose out on petroleum-related income tax. State-owned firm Petronas has shut 14 of its rigs in response to lockdown measures. Malaysia needs to sell at US$70 per barrel to break even and could lose up to $8 billion. As a net exporter of oil, it is vulnerable to price fluctuations—every US$1 drop in Brent crude oil means a total loss of RM300 million (US$68.8 million).
The value of Thai and Vietnamese oil slumped with Thailand projected to lose 10 billion baht (US$307.8 million) as sales collapsed. While analysts do not forecast prices in Thailand going negative, they do not see them rising above US$30 per barrel for the time being.
Singaporean banks are concerned after trading companies collapsed
Singapore’s production levels have dropped. The collapse of the Hin Leong Trading company prompted other traders in the region to reassure their clients that the same will not happen to them. HLT did not disclose US$800 million in losses and owes $3.85 billion to more than 20 lenders. Its collapse came after the oil price drop as the firm was unable to hide those losses any longer.
HLT’s demise follows two others—Agritrade International and Hontop Energy—yet the government is confident that the situation will have “no serious impact” on Singapore’s oil sector. As the world’s largest bunkering port—one that supplies ships with fuel—Singapore should have enough diversity in its economy to weather the price crash. However, its banks are worried and are tightening their credit lines.
South China Sea disputes could stymie Malaysia’s expansion efforts
Adding to the uncertainty is the situation in the South China Sea, where China, Malaysia and Vietnam are engaged in a three-way dispute that has been brewing for four months. After Petronas drilled in an area claimed by both China and Vietnam in December, China sent in ships to intimidate the state-owned company. Australia and the US have since stepped up their presence.
China is pushing for joint energy development in the region, but neither Malaysia nor Vietnam is interested. Continued aggression from China could limit Malaysia’s production levels and lead to more serious incidents. “China’s response sends a message that actual production of oil and gas in Blocks ND1 and ND2 would be prohibitively risky for any commercial actor, including Petronas,” reported the Asia Maritime Transparency Initiative.
What are ASEAN nations doing to mitigate problems from the oil price crash?
Some OPEC and ASEAN countries are reducing their production capacity. Brunei and Malaysia have cut their output since January 2017 as part of an agreement to try to prevent oversupply. While they are not OPEC members, they are part of the ‘OPEC+’ group which cooperates with OPEC production quotas.
Malaysia’s government says it will reprioritise expenditure and look to increase the diversity of its consumer base. Indonesia has revised its production and export targets. During previous price slumps, Vietnam profited by buying up reserves of oil at low prices and selling once the price goes up. However, Hanoi cannot pursue this lucrative path as it has insufficient storage space—thanks to unsold oil stocks.
Vietnam’s government also faces calls to ban oil imports. Such a move would free up some liquidity and avoid exacerbating oversupply issues. There is a precedent in Asia at least, as Pakistan banned oil imports until demand picked up again.
What is the future of Southeast Asia’s oil industry?
Falling revenue means new projects in Brunei, Indonesia, Malaysia and Myanmar will not start on time. That will impact output levels in the long term. Production and export targets will likely be further revised downwards. As lockdown measures ease, demand for oil will increase and prices should start to rise, but this will take time.
“While we’re starting to see COVID-19 cases ease and some countries ease restrictions, those initial moves look fairly tentative. The market’s coming round to the view there’s going to be no quick recovery in demand,” predicted Daniel Hynes, Australia and New Zealand Bank’s senior commodity strategist.
Some analysts fear that the impact of the pandemic may last until early 2021, but others are more optimistic. As GPB Global Resources Founder and Managing Director Boris Ivanov argued, “Once the outbreak is controlled, the global economy, particularly China and India, is expected to rebound at a notable rate. As a result, global oil demand could double or triple to make up for the lost demand.”
COVID-19 has put every economy into unchartered territory, but historically, oil prices have rebounded following economic shocks. Demand for oil will pick up again, and that offers a little solace to those economies in ASEAN that are taking the heaviest blows.