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An interesting interview with Lana Soelistianingsih was published in Indonesian tabloid Kontan, a magazine that focuses on the economy and financial markets of Indonesia. Soelistianingsih is Head of Economy at Samuel Aset Manajemen as well as a teacher at the Economics Department of the University of Indonesia. The topic of the interview is crude oil.
So far this year the crude oil price has weakened about 20 percent to the range of USD $44 - $45 per barrel. What makes the oil price move and what is the impact of the oil price movement on Indonesian shares and other commodities? Kontan asked this - and more - to economist Lana Soelistianingsih.
Question: What are the main factors that caused the sliding crude oil price so far this year?
Lana: The main factor that caused the declining oil price so far this year is robust oil production. The Organization of the Petroleum Exporting Countries (OPEC) had indeed agreed to cut oil production toward the end of 2016 but in the March-December 2016 period these countries had actually already raised their oil production levels considerably. As such, the agreement to cut crude output had limited effect.
OPEC set a USD $60 a barrel target for 2016. However, in reality the oil price failed to stabilize at USD $55 per barrel, the oil price's peak level so far in 2017 that was touched in March 2017. Considering it costs about USD $40 to produce one barrel of oil, it became too attractive for oil producers to boost production in March when the price was around USD $55 a barrel. Also in the United States we saw rising oil production. Thus, there emerged another round of pressures on the global oil prices.
But actually, although the oil price has been sliding so far this year, it remains at an average higher level than in the preceding year. In 2016 the price even went to the low USD $30s.
Question: Is it only the supply-side that puts downward pressure on the oil price?
Lana: During the first three months of the year oil production exceeded oil demand. Despite the global economy modestly improving, it did not translate to rising oil demand. The 2008 crisis affected the economies of the United States, Japan, European Union and China. For example in China many businesses and factories lowered production and started to focus on efficiency measures to weather the economic storm. However, when the economy improved they did not immediately boost output significantly and that is why oil demand remained low.
When Donald Trump was inaugurated as US president in January 2017 it led to rising oil prices because there emerged expectations about rising "military inflation" in the USA, a phenomenon that indeed always tends to happen when a republican is in office.
Between mid-June and early July 2017 we saw crude oil prices again rise. This is part of a seasonal matter because in the June-August period (the summer period) oil demand rises as people go on holiday or take trips. But this summer season ends in August. I expect oil to be in the USD $45 - $47 a barrel range by then, slightly higher than now.
Question: After the summer ends will the oil price fall again?
Lana: Last month there were reports that oil production in Nigeria, Libya and Saudi Arabia have increased. This causes markets to doubt whether OPEC members are indeed truly committed to cut oil output. Even the World Bank stated after the first quarter of 2017 that the global oil supply and demand would be equal (with the price at USD $55 a barrel by the year-end) provided OPEC would continue to be committed to its oil production cut agreement. However, because several OPEC members cannot control themselves they make it difficult for the price to rise.
Question: What is the impact of the oil price on prices of other commodities?
Lana: The oil price of course impacts on prices of other commodities, particularly energy commodities. However, at this moment it is not so much the case. For example, the crude palm oil (CPO) price usually follows the oil price. This year, however, the world's biggest CPO producers and exporters - Indonesia and Malaysia - saw CPO production rise as many trees reached their peak production age. This thus puts downward pressure on CPO prices, while oil is expected to rise this year (compared to 2016).
Question: How about the relation between coal and oil?
Lana: The coal price is currently being supported by the policies of the Chinese government. Local authorities in the world's second-largest economy curbed coal production in an attempt to let the coal price rise. This would improve the financial situation of Chinese miners. Prior to these policies there had emerged concern about the non-performing loan (NPL) ratio in China's banking sector as coal miners encountered difficulty to repay debt to banks.
China lowered production hours at local coal mining sites, a policy that is evaluated every three months. If it wants to raise the coal price, then it simply decides to import coal. If it decides to slow coal imports, then the price falls. In case coal demand in China rises then certainty the coal price goes up (China being the world's largest producer and consumer of coal). So, China is the one who determines the coal price.
Question: What about the impact of the oil price on Indonesian stocks?
Lana: In the past when the oil price would rise, Indonesian stocks would climb accordingly as Indonesia is an economy that is pretty much build around commodities. The last time we saw that trend was last year. This year matters have changed, reflected by strong capital inflows into Indonesia while the oil price went downward. Whether this constitutes lagged investment or another anomaly, I do not know. The same applies to the Indonesian rupiah. In the past the value of the rupiah would - for about 80 percent - follow the movement of the oil price. Currently, however, this is not the case anymore.
Question: Are there stocks that are particularly vulnerable to oil price movements?
Lana: Obviously commodity stocks, especially energy stocks, can become victim of negative sentiments when the oil price falls. However, it also depends on the cash flow of the company. In 2016 miners were the top gainers in the Jakarta Composite Index - despite the bleak oil price - as they booked great earnings.
Another example of a falling oil price not impacting negatively on miners is that production costs of coal miners falls in times of low oil prices. Or, those companies that use large quantities of oil such as national flag carrier Garuda Indonesia (although its shares failed to rise over the past month when oil prices fell).
Another factor that needs to be taken into account is that low oil prices tend to result in lower inflation, implying people's purchasing power strengthens, thus they are able to consume more. This should boost earnings of companies such as Indofood Sukses Makmur or Unilever Indonesia.
Question: Can lower oil prices impact on projects or government programs?
Lana: It does not affect domestic infrastructure projects. The government already set fixed, mandatory targets and results are starting to show. By 2019 many of the projects and programs should be completed, despite the relatively high interest rates.
Regarding domestic fuel prices, I see limited impact of global oil prices. On 1 June the government left fuel prices unchanged, while global oil prices had declined. However, there is an impact on the electricity tariff. Lower oil prices should translate to lower basic electricity tariffs as the formula for the determination of the basic electricity price (TDL) involves the Indonesian crude oil price (75%), rupiah depreciation (20%) and inflation (5%).
Question: What factors can influence the oil price this year?
Lana: Geopolitical troubles need to be monitored. For example rising tensions between the USA and China in the South China Sea, or tensions surrounding North Korea's ballistic missile tests. In case there emerge military actions or clashes, it could take the crude oil price to USD $60 a barrel.
Without military clashes, I expect the oil price to range USD $45 - $47 a barrel by the year-end.
Mohon dikoreksi, yg benar adalah PT SAMUEL ASET MANAJEMEN.