Bullish stance on sector

PETALING JAYA: The projection that oil prices would remain higher over the medium term in the range of between US$80 and US$90 per barrel has led Hong Leong Investment Bank (HLIB) Research to maintain its “overweight” call on the local oil and gas (O&G) sector.

The research house said in a note published yesterday that the oil price prediction is premised mainly on continued production cuts from the Organisation of the Petroleum Exporting Countries (Opec) to pre-empt a potential lower demand arising from economic risk at least until mid-2024.

Recapping, it noted that the Organisation of the Petroleum Exporting Countries and allies (Opec+) had announced back in October last year that it had agreed to a production cut of two million barrels per day (mbpd) until December 2023 as the cartel held a cautious view on the global economic outlook.

It said: “The Opec+ production cut was to prepare for the impact of an economic slowdown inflicted by China’s sluggish post-pandemic recovery as well as high interest rates and inflationary woes in the West.

“In retrospect, the oil market plummeted to a low of US$70 per barrel in early 2023 from US$100 per barrel late last year as there were widespread fears over the macroeconomic outlook, prompting destocking in global oil inventories.”

Additionally, the research house reported that a compliance lag by Russia for the committed 500,000 barrels per day cut early this year and rising oil production from Iran also contributed to the weaker oil price during that period.

On the other hand, HLIB Research pointed out that global oil demand had turned out to be more resilient than expected with consumption reaching an all-time high at 102 mbpd, which in turn, propelled the recovery of oil price back to the range of US$85 to US$95 per barrel in the third quarter.

“In our opinion, we reckon the cartel is in no rush to loosen its taps as the cloudy global economic outlook may derail demand growth in 2024, underpinned by the higher-for-longer interest rate environment that softens consumption and limits upside for commodity prices,” it said.

On top of the supply element, the research unit commented heightened geopolitical risk is also a major influence as the market factors in the potential escalation of Israel-Gaza conflict in the Middle East, coupled with limited supply capacity growth.

It added that the eruption of Israel-Gaza war triggers fears over the possible escalation into a regional conflict entangling major oil producing nations in the Middle East, potentially fuelling more supply uncertainties to the oil market.

“The alleged involvement of Iran in the war conflict might result in some form of intervention by the United States, which may entail tighter enforcement of its sanctions on Iran’s oil exports.

“As Iran is one of the major sources of additional crude supply this year, significant swing in Iran’s oil production will exacerbate the volatility of oil price,” said HLIB Research.

On a separate note, it said rising US output is alleviating a tight supply market, in the near term, as US crude output hit a record high of 13.05 mbpd in Aug 2023, an increase of 1.06 mbpd year-on-year (y-o-y).

This was mainly contributed by increasing shale oil production at an all-time high level of 9.8 mbpd.

However, the research house is of the view that the United States oil production growth will soon reach its ceiling in a few years as the Permian Basin is likely to fall into decline, since much of the most productive acreage has been drilled, with oil majors also vowing to limit capital expenditure spending on fracking.

More importantly, HLIB Research reported that Opec and the US Energy Information Admistration (EIA) are forecasting oil demand growth of 2.44 and 1.32 mbpd y-o-y in 2024, respectively – mainly driven by China and other emerging economies.

It said the prediction difference comes from Opec’s expectation of marginal growth in the Organisation for Economic Co-operation and Development countries whereas EIA takes a more prudent stance that demand will stay flattish in the region.

HLIB Research’s top picks for the O&G sector are Bumi Armada Bhd, Hibiscus Petroleum Bhd and Wasco Bhd, with respective target prices of 69 sen, RM3.22 and RM1.27.

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