Oil enters bullish cycle

KUALA LUMPUR: Oil may be in for a bullish cycle as the reopening of major economies drives up demand faster than expected amid the current low investment in the oil and gas sector.

According to the International Energy Agency (IEA), global oil demand could return to the pre-crisis levels of 2019 within a year from strong demand in the United States, Europe and China.

In its monthly oil market report in May, the IEA said the excess oil inventories of the past year had been all but depleted, and a strong demand rebound in the second half of the year could lead to steeper stock draws.

It further noted in its June report that global oil demand could rise by 5.4 million barrels per day (bpd) in 2021 and a further 3.1 million bpd next year.

This recent view regarding oil demand is in stark contrast to its earlier forecast in March this year when the IEA said global oil demand would take until 2023 to return to the pre-pandemic levels of 100 million bpd.

In view of this development, AmInvestment Bank has maintained its “overweight” rating on the oil and gas sector for the next 12 months.

The research house noted that crude oil prices have risen by 74% to US$75 (RM312.56) per barrel currently from an average of US$43 (RM179.20) in 2020.

The rise in prices will further support a global resurgence in capital expenditure (capex) rollouts and structural re-rating prospects of independent exploration and production (E&P) producers and service providers.

While there is an urgency for oil companies to reduce their carbon emissions in line with energy transition policies, there is also growing pressure to meet rising demand for energy.

If there was no further oil and gas investment, energy research firm Rystad Energy projected that South-East Asia’s natural gas will naturally decline by a substantive 60% to 7.5 billion cubic feet/day by 2030 from 19 billion cubic feet/day in 2020 while liquids will drop by a higher 67% to 600, 000 bpd from 1.8 million bpd.

Even with capex being deployed over the past four years, South-East Asia’s liquid production has been declining significantly, down by 36% to 1.8 million bpd in 2020 from the peak production of 2.8 million bpd in 2000.

This is expected to slide further to 1.6 million bpd in 2025 and 1.4 million bpd in 2030.

AmInvestment highlighted that on a base case demand scenario, premised on projects deemed likely to be sanctioned, Rystad Energy had expected global liquids supply shortfalls of 22 million bpd (22%) by 2030 and 28 million bpd (35%) by 2040.

“Almost half of the global liquid production of 80 million bpd in 2030 is projected to derive from the infilling programmes of non-shale producing fields, as conventional output naturally declines by 54% over the next 10 years.

“Hence, substantive global investments are still required over the next 10 to 20 years to stave off the projected supply deficit.

“In the absence of such investments, we expect another super bullish cycle, similar to the 2004-2007 run-up, which will drive crude oil prices to levels well above US$100 (RM417) per barrel, ” AmInvestment said.

In line with its 'overweight' stance on the sector, the brokerage has also kept its “buy” calls on eight companies under its coverage: Bumi Armada Bhd, Dialog Group Bhd, Hibiscus Petroleum Bhd, MISC Bhd, Petronas Chemicals Group Bhd, Petronas Gas Bhd, Sapura Energy Bhd and Yinson Holdings Bhd.

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