KUALA LUMPUR (Oct 4): Malaysia’s energy stocks extended their gains on Friday as crude oil prices continue to rally, amid fears of escalating Middle East tensions and their impact on global oil supply.

The Bursa Malaysia Energy Index, which tracks 23 oil and gas (O&G) stocks, rose as much as 4.15% in the morning session, while the country's benchmark index FBM KLCI was down 0.14%.

Investors should take note that geopolitical risks will remain a constant concern given the current multipolar world order, BIMB Research analyst Azim Faris Ab Rahim told The Edge.

“It is recommended to get exposure to oil and gas stocks as a hedge against this risk,” Azim said, noting that the valuation of the energy sector remains undemanding currently.

Brent, the global benchmark for crude oil, surged to US$78 from under US$70 last month amid fears that Israel could target Iran’s oil production capabilities in retaliation for recent strikes.

Iran, the world’s seventh-largest oil producer with output of nearly three million barrels of oil per day, on Tuesday fired dozens of missiles into Israel in response to Israel’s air strike that killed Hassan Nasrallah, leader of the Iran-backed armed group, Hezbollah.

It marked an escalation of the Palestine-Israel war and genocide which in recent months saw the assassination of military and political leaders from Palestine's nationalist group Hamas.

However, the current oil price rally is likely to be temporary, as the underlying global supply-demand dynamic continues to favour a surplus, said Apex Securities analyst Ong Tze Hern.

“Demand will eventually plateau while supply is still growing,” Ong said. He also flagged that volatility in foreign exchange fluctuations could pose another headwind for oil prices and recommended that investors "sell into strength" O&G-related stocks during such periods to capitalise on market momentum.

Among energy-related stocks, the top movers comprise petroleum refiner Hengyuan Refining Co Bhd (KL:HENGYUAN), whose shares jumped 17.45% or 41 sen to RM2.76, and upstream services firm Dayang Enterprise Holdings Bhd (KL:DAYANG), whose shares were up 7.17% or 16 sen to RM2.39.

Independent O&G producer Hibiscus Petroleum Bhd (KL:HIBISCS) rose as much as 7.31% or 16 sen to RM2.35, while storage tank operator Dialog Group Bhd (KL:DIALOG) climbed 4.21% or nine sen to RM2.23. Upstream floating asset operator Yinson Holdings Bhd’s (KL:YINSON) shares rose 3.02% or eight sen to RM2.73.

The latest round of O&G market swing has yet to reach levels seen during other conflict-induced rally, such as during the start of the Palestine-Israel conflict in October 2023, when Brent surpassed US$90 per barrel, as well as the start of the Russia-Ukraine war, when the commodity topped US$100 per barrel.

The jump in oil prices “arguably expresses elevated geopolitical worries,” Vishnu Varathan, head of macro research of Asia ex-Japan at Mizuho Bank, wrote in a note. “But it falls short of all-out conflict fears.”