HIGHER oil price expectations may be on the cards following OPEC+ readiness to undertake moderate production cut but the oil & gas (O&G) sector’s over-dependency on Petronas as a pivotal revenue stream will weigh on industry prospects.
Hong Leong Investment Bank (HLIB) Research for one is not prepared “to overweight” the sector as yet given the national oil corporation is unlikely to ramp up on its capex spending despite higher oil prices due to its dividend commitments to the Government.
“We believe that Petronas would still remain frugal on its capex spending as the Malaysian government is still heavily reliant on Petronas for its dividends,” opined analyst Low Jin Wu.
Moving forward, the research house expects crude oil prices to average at US$55/barrel (from US$50/barrel previously) based on (i) OPEC’s commitment to stabilise oil prices at higher levels; (ii) recent COVID-19 vaccine developments; (iii) buoyant crude oil demand from China; and (iv) decreasing US crude oil inventories.
For 2022, the research house forecasts oil price at US$60/barrel. “We believe that crude oil demand would surpass supply in 2021 and a greater equilibrium is expected after a discovery of a successful vaccine.” projected Low in a sector outlook.
“While the downside risks for crude oil are still apparent, we believe that the fundamentals of crude oil prices are improving.”
In this regard, HLIB Research maintained its “neutral” outlook on the O&G sector as it believes that earnings recovery for O&G services players is not imminent.
However, TA Securities Research holds a more bullish view, expecting higher demand following global economic recovery which will lead to a corresponding ramp up in O&G production.
“In turn, this translates to resumption of upstream O&G capex and opex spend,” projected analyst Kylie Chan Sze Zan. “Therefore, this would activate a rebound in daily charter rates (DCR) and new contract awards for O&G contractors.”
Additionally, higher O&G production output is also expected to catalyse demand for petroleum tankers and LNG vessels to transport fuels to refineries and regassification plants.
On top of that, there is now a brighter prospect for petrochemicals given there is now a high chance of a cool-down in the US-China trade war with the upcoming inauguration of Joe Biden as US president to replace incumbent Donald Trump.
“Unlike Trump’s confrontational trade policies towards China, Biden will unlikely implement new tariffs that will disrupt petrochemical trade flows,” projected the research house while retaining its “overweight” outlook on the O&G sector. – Dec 7, 2020
