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Impact of Higher Oil Prices on Asia

10 October 2018Emerging Markets
Brent Crude Price reaches a 4-year high - Market Insights by Citibank UK

Brent Crude price reached a 4-year high of $86.29 per barrel on 3 October 2018 after Saudi Arabia and Russia rejected calls by Donald Trump to increase production during the OPEC meeting in September. While Citi's oil price forecast remains at $79 per barrel for Q4 2018, recent price trends warrant an assessment of what the risk of sustained higher oil prices mean for Asia.

The rise of oil price has raised questions of inflation. While inflation in EM Asia is rising, Citi analysts note that at 2.4% it's far below 16% inflation in 1994.

Within Asia, oil price sensitivity of inflation is greatest in Philippines, Thailand and India while China, Singapore, Korea and Taiwan are less sensitive. Subsidies have made Malaysia and Indonesia least inflation sensitive to oil as both have reversed course on their fuel subsidy reforms announced in late 2014, particularly, mass-market fuel and electricity prices have been capped in Indonesia ahead of elections, while Malaysia has introduced "broad-based subsidies" on fuel since before the elections in April.

Citi's Oil Price Forecasts - Market Insights by Citibank UK

Fiscal implications of higher brent crude price look most negative for Indonesia, followed by Malaysia: India and Malaysia have relatively higher government debt ratio, but Indonesia's greater reliance on foreign capital flows to finance its fiscal deficit alongside State-Owned-Enterprises (SOE) financing needs makes it also more market-sensitive to incremental fiscal slippages. India's current account deficit (more than 3% of GDP) is vulnerable to higher oil price given that it is a large net importer.

Further oil price increases could weaken market sentiment however Citi analysts expect the sources of risk to lessen given:

  • Citi's oil price forecasts include Brent Crude to average $70 per barrel in 2019
  • Trade tensions could moderate relative to market expectations
  • Recovery in China's infrastructure investment growth reflecting impact of stimulus
  • Recent oil price spike could dampen oil demand next year.

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