It's all about the oil

I know I was supposed to tell you bout Bali, but hold on. Let's take a break from holiday mood and get some heads cracking - since I just got back to work today! :P

So what's new? Some O&G companies reported a loss for Q4. I wonder too how the market will react tomorrow.

Crude oil prices have started trading at the USD 100-level once again. What's that in Ringgit? RM 305-ish?  Last we saw this was back in 2008, the spectre of a derailment in the fragile global economic recovery looms just as the world is working its way out of the slump triggered by US subprime crisis in 2008. Too much weak credits being extended to customers indeed!

High oil prices will definitely have a negative net effect on the world economy. Sustained high commodity prices curb economic activity, hurt corporate earnings and government finances and fuel inflation. Impact on financial market is also hard to ignore as corporate earnings will be reflected by stock prices, while high inflation influences central banks' monetary policies.

Higher cost will of course impact consumption, that goes without saying. Sustained high prices of the hydrocarbon commodity could lead to slower consumer demand in the US - the world's largest economy. US would then import less from exporting nations such as us, Malaysia.

In simple maths, costlier crude oil = higher cost of doing business = more expensive consumer products = less disposable income for people like us = reduction in the propensity to spend. 

However, if companies go the other way around and decide to absorb the incremental costs = lower profits = leads to businessman trimming capital reinvestments and freeze hiring to safeguard earning = lower employment. 

Then inflation comes in. Rising inflation in Asian economies has fuelled expectations of further interest rate hike. So far, stock markets have reacted adversely to rate hikes expectations and of course the unrest and tensions in the Middle East. However, rising inflation can also prompt investment demand for crude oil, purely because it acts as a safeguard against rising prices.

I guess the one thing that will always play in our little mind is whether it will last and how high will oil go?

Disclaimer : I do not represent anyone or anything in any way. This does not act as an investment strategy either in any slightest way.