HIGHER final investment decision (FID) activity and a more promising vaccine development has elevated optimism in the oil & gas (O&G) sector, prompting Maybank IB Research to raise its crude oil price assumption to US$55-60/barrel for 2021 (from US$45-50/barrel previously).
That said, the research house remains mindful of the rising volatility, still soft demand outlook and the ongoing, underlying tension at OPEC+ which it deems as key risks to its projection.
“The improved optimism, in our view, is mainly triggered by the weather disruption and supply cut effect,” rationalised analyst Liaw Thong Jung in an O&G sector update.
“The unusual polar vortex disruption (stronger and longer than usual), which meteorologists described as one of the biggest, nastiest and longest-lasting since the 1950s, has wreaked havoc this year by causing record freeze and crazy weather events to the Northern hemisphere, knocking off power grids, disrupting energy supply and drawing down crude inventories.”
Moreover, Saudi Arabia’s recent move to pledge extra, voluntary production cuts (-1 million barrels per day) in February-March 2021 has also led to a tighter oil supply.
Year-to-date (YTD), Brent crude price has recently surpassed US$60/barrel level, reaching a high of US$63/barrel on Feb 18 and averaged US$57/barrel.
“Our revised estimates are generally in line with consensus (Energy Information Administration (EIA) and Fitch Solutions: US$53/barrel),” noted Maybank IB Research.
“That said, the fundamentals of the global oil demand remain soft still, albeit on course for a recovery but will still fall short of its pre-COVID-19 level (2019) this year.”
Moving forward, the research house said development at OPEC+ and the shale market will have to be closely monitored (i.e. co-operation/compliance/discipline) for it will shape the direction of the oil market. The research house offers four reasons for that:
- OPEC+ compliance with pledged oil output curbs have fallen to 75% in December 2020 which is the lowest since the supply pact started in May 2020 raises concern;
- A collapse in cooperation between Saudi Arabia and Russia could trigger the March 2020 event all over again (OPEC+ break-up, price war, oversupply situation);
- A move to increase supply in the subsequent months (April onwards) should see a softer oil price; and
- Shale could make a comeback if oil price remains elevated and sustained over a long-term.
“Putting things into perspective, while the recent sharp run-up in the oil market has improved sentiment, it has also elevated volatility concerns which does not augur well for budgeting/ investment decision-making,” added the research house.
Its five key “buy” counters are Dialog Group Bhd, Icon Offshore Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd, Wah Seong Corp Bhd and Yinson Holdings Bhd. – Feb 22, 2021
