Tuesday, November 30

O&G sector expected to continue trading sideways

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KUCHING: The oil and gas sector is expected by analysts to continue trading sideways while they have also projected gradual increase in capital expenditure (capex) in the upstream segment.

According to the research arm of Hong Leong Investment Bank Bhd (HLIB Research), average Brent crude oil prices weakened 7.5 per cent sequentially to US$49.6 per barrel (bbl) in the second quarter of 2017 (2Q17) (compared to US$53.6 per bbl for 1Q17) due to increase in US crude oil production.

“As per latest update from Baker Hughes earlier this month, US land rig stood at 927 rigs, further reaffirming US oil production ramp up being the major contributor to the weak oil prices,” HLIB Research said.

HLIB Research noted that the Energy Information Administration’s (EIA) forecast implies that world oil demand would be strong in the second half of 2017 (2H17) due to seasonality.

The research arm further noted that sizeable world oil inventory drawdown is expected to occur in 3Q17 by an estimate of 0.4 million bbls per day due US summer driving season.

“Draws on oil inventory is expected to taper off in 4Q17 before inventory build-up resumes in 2018,” it said.

In 1H17, Brent has averaged at US$51.6 per bbl, still within HLIB Research’s forecast range of US$50 to US$60 per bbl for whole year of 2017 albeit at the lower end.

As it anticipated strong demand support with inventory draw down in 2H17, the research arm’s full year forecast remained unchanged.

The research arm pointed out that year on year (y-o-y), oil price would still register an improvement from a low base of US$43.7 per bbl average in 2016, leading to a firmer footing for the oil and gas industry.

“Beyond 2017, the industry might not see oil prices reaching US$100 per bbl within the next five years; oil prices might take longer than that to recover to its previous heights mainly due to US shale technology improvement allowing shale oil economics to be viable even at US$50 per bbl level.

“Short investment cycle of shale rig has also given US shale producers the ability to produce more oil within 6 months’ time, lowering oil supply shock possibility for world oil market,” HLIB Research said.

HLIB Research highlighted that despite bleak long term outlook, significant downside appears to be limited as the Organization of the Petroleum Exporting Countries (OPEC) countries would more than likely to be incentivised to extend their production cut beyond March 2018 to cover their government’s fiscal budget.

“EIA has also factored in the extension of production cuts by OPEC in their global oil production forecast,” the research arm said.

It added that overall net deficit of world oil market is expected to materialise in 2017 but will soon return to surplus in 2018 which points to stable oil price outlook rather than improving oil prices.

All in, HLIB Research maintained its ‘neutral’ call on the sector with oil prices expected to remain range bound.

“The sector is expected to continue trading sideways while gradual increase in capex in the upstream segment is expected,” it said.

On a side note, HLIB Research’s top pick for the sector was Dayang Enterprise Holdings Bhd as attractive valuation with a potential value unlocking corporate exercise is expected to refloat Perdana Petroleum Bhd shares.