Higher Brent crude on recovering fundamentals

Opec move to raise oil production seen as a sign of stability

PETALING JAYA: Brent crude, the global oil benchmark, is expected to hover around US$45 per barrel by year-end and at a higher price of US$50 next year amid weak but recovering fundamentals.

The Organisation of the Petroleum Exporting Countries (Opec) and its partners, collectively known as Opec+, is set to raise oil production by 500,000 barrels per day (bpd) starting next month. This will effectively reduce production cuts to 7.2 million bpd from 7.7 million currently, and also superseding earlier agreements of raising it by 2 million bpd.

Analysts said despite this, they expected the markets to react positively because the deal is viewed as a sign of stability amid the disagreements among Opec members.

As at press time, Brent crude was down by 0.71% to US$48.68 a barrel.

Kenanga Research, which is maintaining its “neutral” stance on the oil and gas (O&G) sector, said overall it is keeping its average Brent crude assumptions intact at US$45 per barrel for 2020 and US$50 per barrel for 2021.

“The mild rise in production of 500,000 bpd from Opec+, while still less-than-ideal (as compared to extending current cuts), will not overly disrupt the immediate-term demand-supply dynamics. In any case, a rise by 500,000 bpd is still far better than the status-quo agreement of a 2 million bpd increase.

“While underlying fundamentals still remain weak, we see potential trading opportunities (in contrast to fundamentally-based investment strategies) to fully capitalise on the current vaccine-driven boost in sentiment, looking to take profit in the next two to three months once gains are sizable, ” the research house noted.

As such, Kenanga said it favoured names which have palatable balance sheets and are trading at steeply discounted valuations. Within its coverage, Uzma Bhd emerges as its top trading pick, although there is trading potential in Dayang Enterprise Holdings Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd.

Serba Dinamik Holdings Bhd also remains the brokerage’s favoured fundamental pick, given its promising earnings growth potential coupled with decent attractive valuations.

TA Research is, however, maintaining its “overweight” stance on the O&G sector.

It noted that higher demand following global economic recovery would lead to a corresponding ramp up in O&G production. In turn, this translates to resumption of upstream O&G capex and opex spend.

Therefore, this would activate a rebound in daily charter rates and new contract awards for O&G contractors. Additionally, TA said, higher O&G production output is expected to catalyse demand for petroleum tankers and LNG vessels to transport fuels to refineries and regassification plants.

On top of that, for petrochemicals, it believed there is a high chance of a cool-down in the US-China trade war. This is following the upcoming inauguration of Joe Biden as US president to replace incumbent Donald Trump.

“In our view, unlike Trump’s confrontational trade policies towards China, Biden will unlikely implement new tariffs that will disrupt petrochemical trade flows.

“As we inch closer towards Biden’s inauguration date, and as price traction in polymers and paraxylene accelerates, we upgrade the valuations of petrochemical players by 1-2 times forward enterprise value/earnings before interest, taxes, depreciation and amortisation.

This has resulted in TA to change its target prices for Petronas Chemicals Group Bhd to RM8.60 (previous: RM7.50) and Lotte Chemical Titan Holdings Bhd to RM3.58 (previous: RM3.16).

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