Oil prices surged over 15% following news that a number of OPEC and then non-OPEC oil producers agreed to cut oil production beginning in 2017. If all parties comply with the new targets, production is set to fall by well over 1.5 million barrels per day, a substantial drop in global oil output and a 4.5% reduction in OPEC output. This is potentially good news for some Southeast Asian (SEA) office markets, particularly Jakarta and Kuala Lumpur.

Effect of cheap oil on Jakarta and Kuala Lumpur office markets

Hounded by sustained low prices for the past two years, oil & gas companies have seen profitability decline across Asia Pacific, forcing them to rein in costs. Headcounts have been slashed and they have had to rethink their office leasing strategies, meaning many oil & gas companies have surrendered space.

Figure 1: Brent Crude Oil Price
Source: Oxford Economics

Both the Jakarta and Kuala Lumpur office markets have been hard hit. The timing was particularly tough for Jakarta where a large wave of office supply began to complete construction starting from 1Q 2015. The supply volume was relatively more manageable in Kuala Lumpur over that period. Nevertheless, the drop in oil prices contributed to downward pressure on rents in these markets. According to JLL Research, Jakarta rents declined 8.6% in the 12 months to Q3 2016, while Kuala Lumpur rents were down a more moderate 2.4%.

Figure 2: Office Net Effective Rent Index – Jakarta and Kuala Lumpur
Source: JLL Research

Impact of surging oil price on office demand

While views on the impact of the oil production cut are mixed, many believe that even with increased production from higher cost sources, e.g. shale, global oil supply will tighten in 2017 to the extent that a global oil deficit emerges, creating a scenario where global stocks of oil are driven down. This in turn would support a sustained rally in the price of oil over much of 2017.

The effect on the Jakarta and Kuala Lumpur occupier markets depends on the extent of the rise in oil prices and for how long higher prices can be sustained. While a recovery to pre-2105 levels is highly unlikely, the profitability of large oil refiners and petroleum-based product manufacturers will no doubt benefit from even a modest increase in the price of crude oil, and a turnaround in the growth of their business will be a boon to occupier markets.

Although a pickup in demand won’t happen overnight, higher oil prices, as part of a broader recovery in commodities prices, would lend support occupancy levels and possibly a rental recovery in both of these office markets.

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