Tuesday, October 26

Limited impact of higher oil prices on O&G sector

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KUCHING: The local oil and gas industry remains firm and faces little impact on the rise of crude oil price as a result of colder weather conditions in the Northern Hemisphere.

MINIMAL IMPACT: An oil refinery is processing crude oil into petrochemical and petroleum related products. Local oil and gas sector will not be impacted by the high crude oil prices resulted from the winter condition in the Northern Hemisphere.

MINIMAL IMPACT: An oil refinery is processing crude oil into petrochemical and petroleum related products. Local oil and gas sector will not be impacted by the high crude oil prices resulted from the winter condition in the Northern Hemisphere.

OSK Research Sdn Bhd (OSK Research) in a research report cited that the rise in oil price would be a temporary situation after which it  might consolidate back to US$70 per barrel level when the weather condition returns to normal.

It projected that there might be some short-term excitement for the sector but the situation should normalise when the bad weather is over.

It noted that the start of new oil and gas projects would need to be based on a longer term view of oil price stability as projects might take about 10 to 15 years to complete.

In contrast, the research firm believed that oil prices should stabilise at US$70 to US$80 per barrel this year where most of the oil and gas projects were commercially viable.

Meanwhile, the cold winter in the Northern Hemisphere has pushed the price of crude oil above US$83 per barrel for the first time since the price of crude oil crashed in the middle of 2008.

OSK Research noted that the cold weather in some countries led to higher demand for heating oil. It observed that the stockpiles of US heating oil have fallen to about 44 million barrels recently.

It observed that the situation has helped to drive up heating oil price, whereby the February delivery for heating oil had increased in price to above US$2 per gallon in New York, representing a new high since October 2008.

The research firm believed that oil price would continue to stay above US$80 per barrel in the short-term. It said further signs supporting oil price was the speculative activities as evidenced by a surge in speculative long positions on the New York Mercantile Exchange (NYMEX).

On the other hand, it viewed the higher crude oil price to result in higher demand for coal and other fuel sources. It pointed out that the cold weather will affect the transportation sector in the short-term.

It also observed that the Baltic Dirty Tanker Index (BDTI) increased almost double from November 2009 levels to 1,046 points due to demand for heating oil as well as port congestion as a result of cold weather.

In the meantime, OSK Research stated there were no direct impact to Malaysia’s air carriers although there were snowstorms which caused some flights cancellation and rescheduling.

In addition, the research firm also forecast that the current Northern Hemisphere winter will not cause a big impact on demand for palm oil if the cold spell resulted in increased demand for biodiesel.

Nevertheless, it said palm biodiesel could result in substitution effect if other edible oil with lower Cold Filter Plugging Point (CFPP) such as rapeseed and soybean oil was used for biodiesel.

However, it noted that if the cold weather is prolonged, it could impact  palm oil demand for cooking purposes as cooking oil producers tend to decrease the proportion of palm oil used in blends in cold weather.

As a result, the premium commanded by soybean oil against palm oil is expected to widen from the current levels of US$106 per tonne.

Hence, due to the cold weather conditions in the Northern Hemisphere, OSK Research remained optimistic on the oil and gas sector but neutral on transportation and less optimistic on the plantation sector.