Bouyant times for O&G players


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PETALING JAYA: Exploration and production as well as petrochemical companies should continue to enjoy strong earnings as oil prices remain elevated on resilient demand and heightened geopolitical tensions.

Just on Wednesday, oil touched US$90 (RM378.27) a barrel for the first time in seven years amid tight supply and concerns of further supply disruption.

Notably, views that oil could hit the US$100 (RM420.23) mark are gathering pace.

In its latest sector report, RHB Research noted that the price trend has continued to outperform its expectations.

The research house raised its Brent crude oil price forecasts to US$83.00-US$70.00 (RM348.79-RM294.16) a barrel from US$69.00-US$65.00 (RM289.96-RM273.15) previously for the 2022-2023 period.

“This is to reflect a stronger-than-expected demand despite an environment with a widespread Omicron variant, lower-than-expected supply pressures and risk premium amid geopolitical uncertainties,” it said.

RHB Research also maintained its “overweight” rating on the oil and gas (O&G) sector, particularly for Malaysia and Thailand.

It said exploration and production and petrochemical companies should see robust earnings in the coming quarters as they ride on strong commodity prices.

Meanwhile, O&G service providers should gradually benefit from an increase in domestic capital expenditure allocations and stronger recovery activities this year.

Given the buoyant oil price, the brokerage favoured companies such as Petronas Chemicals Group Bhd (target price: RM9.91) and Bumi Armada Bhd (target price: 62 sen).

Based on available data, RHB Research opined that crude oil demand should increase by 4.2 million barrels per day (mbpd) in 2022.

“We expect oil prices to trend higher to an average US$90 (RM378.27) in the second quarter of 2022 due to elevated geopolitical tensions in the near term. We do not think this would result in a massive supply damage in the longer term.

“Thus, we keep a relatively lower price forecast at US$75-US$80 (RM315.17-RM336.18) in the second half of 2022, on the back of higher supply pressure from the Organisation of the Petroleum Exporting Countries (Opec) in accordance to their production schedule and a potentially stronger comeback of the United States production as the country’s rig count is still on the rise,” it added.

Recent escalation of tensions between Russia and Ukraine as well as the Yemeni conflict in the Middle East could pressure the global spare capacity as the Organisation for Economic Co-operation and Development oil stocks are at a seven-year low.

RHB Research said further upside for crude oil prices could come from Opec+ being unable to increase production on time, global oil demand turning higher than expected, and unexpected geopolitical events heightening the risk premium.

These may push prices above and beyond RHB Research’s revised forecasts.

On the other hand, downside risks could stem from weaker-than-expected crude oil demand, higher-than-expected production from the US, weaker-than-expected compliance from Opec+ and a lowdown in the global economy.

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