TA Securities Holdings Bhd has maintained its overweight call on the oil & gas sector. This is underpinned by earnings recovery traction on the back of improved balance sheets and earnings, and rebound in Petronas’ upstream domestic capex spend.
In a note on Dec 9, TA Securities said the latter is driven by the need of Petronas’ Pengerang Integrated Complex (completion in 4Q19) to replenish reserves, coupled with the diversion of capex spend from the downstream segment.
“We maintain our oil price assumption of US$70 per barrel for 2020 and introduce 2021 assumption of US$70.
“We believe that oil prices will remain flattish in 2021 on the back of bloated inventories and subdued demand growth on the back of lingering US-China trade tensions,” it added.
The research house’s forecast is based on the Organization of the Petroleum Exporting Countries (Opec) as well as US President Donald Trump’s expectations with deep cuts.
At the bi-annual Opec+ summit held on Dec 6, in Vienna, Austria, the oil alliance trumped expectations by announcing deeper-than-expected production cuts.
Opec+ decided on an additional adjustment of 500,000 bpd to adjustment levels agreed earlier during the Dec 18, Opec+ summit. This implies total adjustments of 1.7 million bpd.
In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions (up to 400k bpd), leading to adjustments of more than 2.1 million bpd. This additional adjustment would take effect from Jan 1, and will be reviewed at the next bi-annual summit on June 10, 2020.
According to the research house, the actual production cuts of up to 2.1 million bpd are nearly double that of expectations. This is on the back of initial consensus expectations of sustained production cuts of 1.2 million bpd.
“As such, we believe this development is positive for oil price (YTD: US$64) given that it cushions prior expectations of a market surplus in 2020, coupled with bloated inventories.
“Therefore, the incremental cuts of up to 900,000 bpd would significantly help to offset 2020 global production surplus.”
However, the research house believed the overall oil market will be positive. It noted that Opec’s 11 members, particularly Saudi Arabia, have been over-complying since initial cuts were first initiated back on Jan 19.
On the flipside, lingering geopolitical tensions may provide a boost to oil price sentiment. In particular, geopolitical risks at the Persian Gulf and Straits of Hormuz may keep oil prices escalated.
Additionally, there is a potential downside risk on US shale production on the back of tightened capital discipline. Furthermore, the slowdown in US shale output is exacerbated by rapid production decline of shale wells due to their short lifespan.
