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This article first appeared in The Edge Financial Daily, on May 16, 2016.

 

Crude-oil_CPO_FD_16May16_theedgemarketsKUALA LUMPUR: It has been two years since the burst of the oil boom and even longer for the puncture of the global commodity boom, in which prices were at multi-decade peaks, if not record highs.

With the global surplus that fuelled oil’s decline projected to shift to deficit as US shale output falls, and the advent of the El Nino phenomenon, crude oil and crude palm oil (CPO) bulls, although not that many as yet, are emerging now amid view that the downside risks have mostly known.

Last week, the International Energy Agency said it is forecasting the global oil supply surplus to ease substantially by year end, which should push the market towards “much anticipated balance” after a volatile couple of years, Reuters reported.

Despite concerns about an economic slowdown, oil demand grew more than expected in the first quarter. There was strong demand in India, China and Russia.

Dr Mark Mobius, Templeton Franklin Emerging Markets Group’s  executive chairman, said he sees cherries ripe for the picking in the Malaysian market, fuelled by an undervalued currency, inexpensive valuations of stocks and a stable government.

He said well-integrated oil and gas (O&G) stocks are one area the fund manager believes could pique investor appetite.

“The major sectors we like now are the integrated oil companies, the companies that are not only in production and exploration, but also in refining and marketing,” he said at a press conference on the sidelines of the Global Islamic Finance Forum 5.0 last week.

Areca Capital Sdn Bhd chief executive officer Danny Wong told The Edge Financial Daily last Friday that taking a one- to two-year view, these stocks are worth a second look now.

MIDF Research analyst Aaron Tan said it may be time to accumulate O&G stocks now, but with caution.

He said as most of the O&G players in Malaysia are service providers, lacklustre oil prices have heavily weighed down on charter rates and impacted availability of jobs.

“If you look at Icon Offshore Bhd,  which won the ExxonMobil [RM42 million vessel supply] contract recently, the charter rates are very, very low,” he said when contacted, adding that charter rates of service providers have reduced from US$2 per brake horsepower per day during the heyday of high oil prices to US$1.60 per brake horsepower per day.

“The companies will still make money, but unlike in the heyday when you were making a 30% margin, perhaps now you will be making [a] less than 10% margin.

In a note on April 7, Tan said O&G companies to look out for are those that are involved in Petroliam Nasional Bhd’s Refinery and Petrochemical Integrated Development project and downstream activities to ride on a potential upside in crude oil prices.

The research firm also has a “buy” call on SapuraKencana Petroleum Bhd.

“SKP (SapuraKencana) covers 90% of the value chain. Since the drop in oil prices in 2014, we found the correlation between prices and SKP is very strong, around 90%,” he said.

“So you can say that you don’t need to know anything about SKP; [you] only need to have an outlook on oil prices,” he added.

Crude oil prices have been hovering around the US$45 per barrel range. It has recovered almost 50% from the trough, but it is still not half of its recent peak at around US$100 per barrel.

Analysts have projected that oil prices could trade up to US$50 per barrel in the second half of 2016.

On the other hand, the outlook for CPO prices could be promising too.

“We expect CPO prices to trade in the range of RM2,500 to RM2,900 per tonne in May this year, and an average of RM2,450 per tonne for 2016 and RM2,600 for 2017,” said CIMB Research in a research note dated May 10 commenting on the palm oil inventory that declined to a 14-month low at end-April.

The third-month futures CPO contract has climbed 14.44% over the past one year. Year to date, it has declined 1.02%.

However, CIMB analyst Ivy Ng isn’t upbeat about the earnings of plantation firms. She expects planters to post weaker first quarter of financial year 2016 (1QFY16) earnings on a year-on-year basis, as the impact of higher CPO prices will be offset by lower production volume.

“The rise in CPO prices is not sufficient to offset lower output due to competition from other edible oils and weaker demand from China,” she explained.

MIDF analyst Alan Lim noted that plantation stock prices have gone up in line with rising CPO prices. However, there are still bargains in the sector.

The research firm’s top pick is Kuala Lumpur Kepong Bhd as the company has a high exposure to the palm oil business. It is also one of the rare index-linked companies which are syariah-compliant counters and is also a member of the Roundtable on Sustainable Palm Oil.

“Another company we like is PPB Group Bhd because the share price has declined quite substantially and we see value after its share price declined because Wilmar International Ltd’s 1QFY16 results are in line,” he added.

PPB Group holds a 18.6% stake in Wilmar.

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