Opec likely to cap production at meeting

Oil nations meeting next month may be more willing to cap production at current levels rather than cut output, according to Suhaimi Ilias, group chief economist, Maybank Investment Bank.

"It is possible that the Organisation of Petroleum Exporting Countries (Opec), perhaps together with the likes of Russia, may cap output at current levels at next month's meeting (in Algeria from Sept 26-28) but we are less optimistic of a cut in output," said Suhaimi.

While a similar initiative failed in April, an agreement can now be reached as Saudi Arabia, Iran, Iraq and non-member Russia are producing at, or close to, maximum capacity, former Opec president

Chakib Khelil said in a Bloomberg Television interview.

Khelil was head of Opec in 2008, the last time it implemented an output cut. "All the conditions are set for an agreement," Khelil was quoted as saying.

"Probably this is the time because most of the big countries like Russia, Iran, Iraq and Saudi Arabia are reaching their top production level. They have gained all the market share they could gain."

In a separate interview, former Qatari Energy Minister Abdullah Hamad al-Attiyah was convinced there is a need for an accord, said Bloomberg.

"Opec and other producers need to do something because for the market to rebalance on its own, that will take a lot of time," Al-Attiyah was quoted as saying. "Even next year, we have to be cautious and not expect that the market will rebalance quickly."

Some are sceptical of any positive outcome.

"Many will remain cautious due to the failure to reach any agreement in April. I think it is more political than anything else.

"Iran will still ignore Saudi's call to limits its production and other Opec member countries are still trying to mend their fiscal positions by exporting as much as they can. Gaining market share is still the name of the game," said Nor Zahidi Alias, chief economist, Malaysian Rating Corp.

Since hitting a nadir of US$41.80 on Aug 2, Brent oil has rallied 22.39%. In fact, Brent crude has surged to its highest level before the Brexit vote, a day after it charged into bull market territory, noted The Telegraph.

Oil prices surged further amid an unexpected fall in US crude stock piles and as the biggest oil producers prepared to discuss a possible output freeze. Prices were also lifted by the weak dollar which makes commodities cheaper for other currency holders, said The Telegraph.

The recent surge in oil price back to the US$50 per barrel was also due to diminished expectation of a US rate hike (hence generating further expectations of US dollar weakness) at next month's Federal Open Market Committee meeting from Sept 20-21, said Suhaimi.

The expectation of a demand-supply rebalancing by next year would continue to support oil prices, going forward, said Zahidi.

"Given that crude oil price is still below two standard deviations (which indicates the amount of variation) of its long-term mean, I believe the downside is rather limited at this juncture," said Zahidi.

Risk appetite is said to have returned to Asian markets. Where are the fund flows coming from and what does it bode for the KL market?

Among other things, consumer sentiment, earnings growth and commodity prices are to be monitored as foreign funds, oil price recovers and the ringgit becomes attractive again, said Danny Wong, CEO, Areca Capital.

"Consumer sentiment and earnings are expected to have hit bottom and are likely to recover although at a slow pace," said Wong.

In terms of the impact on crude palm oil (CPO) price, weather conditions, for example, the La Nina effect which may cause the vegetable/soyoil price to surge, would likely boost the price of CPO, added Wong.

With regard to increased risk appetite, there's been rising play on politically linked stocks, noted Vincent Khoo, head of research, UOBKayhian.

Amid talk of higher risk appetite, there could be a potential pullback in the stockmarket during the latter part of the month due to profit taking.

"Then, if there is no indication of a US rate hike, the rally (on the KL market) can resume in September and October," said Chris Eng, head of research, Etiqa Insurance & Takaful.

The flow of funds into emerging markets stems mainly from Europe fleeing negative interest rates, said Pong Teng Siew, head of research, Inter-Pacific Securities.

"The endgame for the European Central Bank may be rapidly approaching," said Pong. "They have bought up more than half of the investment grade fixed income instruments available in the European markets, leaving pension funds starved of yield and trading opportunities."

So will that be even more positive for emerging markets unless the US Fed raises interest rates and attract money into the United States?

"There is almost no chance (of a US Fed rate hike), given their record of uncertainty. If the Fed is waiting for US gross domestic product growth of 3%-4% before raising rates, there may possibly never come a chance in this expansion cycle for them to raise rates again," said Pong.

Despite the possibility of a non-US rate hike and surge of funds from Europe, there is the question of how long can such record outflows from Europe go on.

This kind of investors with hot money has sometimes been termed "tourist investors."

Columnist Yap Leng Kuen is reminded that it is worth studying the reasons behind rising oil and stock prices to glean the fundamentals.

Source: The Star