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This article first appeared in The Edge Financial Daily on June 26, 2018

Oil and gas sector
Maintain overweight:
In last week’s Vienna meeting, Opec and non-Opec allies decided to raise production output, effective July 2018. The group did not announce a targeted number, but decided to lower the compliance rate to 100%, down from the latest 152% in May 2018. This would translate into 900,000 barrels per day (bpd) incremental production, which is significantly lower than the initial expectation of 1.5 million bpd. Iran, Iraq and Venezuela were reported to have opposed the deal. We are turning bullish on oil prices as macro developments over the past six months have been positive.

The actual production cut has exceeded expectations over the past six quarters, reaching 152% compliance in May 2018, partly at the expense of Venezuela’s current debt crisis. Under this new deal, the group will lower the compliance rate to 100% from July 2018 onwards. By our estimates, this translates into a total 900,000bpd incremental production, with Opec raising 600,000bpd back to the initially agreed 1.2 million bpd. However, we believe the supply would likely be lower due to current limitation from certain countries.

Back in September 2016, Opec and non-Opec countries led by Russia agreed to cut production by 1.8 million bpd for six months in an effort to bring down inventory levels to their five-year average. The deal was subsequently extended by another nine months to March 2018, and again into end 2018 on November 2017.

While we see the possibility of short-term pullbacks from the current US$75 (RM300.75) per barrel (bbl) level and some volatility ahead, depending on the response of US shale producers, we are expecting Brent crude oil price momentum to be positive for the rest of 2018.

We now projecting Brent oil price to trade in the range of US$70 to US$75/bbl for 2018 and for Brent price to be flat at US$75/bbl in 2019. For sector exposure, we reiterate Petronas Chemical as our top pick among the big caps. In the small-mid-cap space, we like Bumi Armada and Serba Dinamik. — Affin Hwang Capital Research, June 25

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