KUALA LUMPUR (Sept 7): Bursa Malaysia’s energy index settled down more than 1% at afternoon break today after US  crude oil prices slipped below US$40 a barrel on Friday before extending losses today as investors weighed factors including the impact of the Covid-19 pandemic on demand for the commodity and Saudi Arabia’s price cuts for supply of crude oil to Asia.

At 12:30pm today, the energy index, which tracks share prices of oil and gas (O&G)-related firms, settled down 10.77 points or 1.33% at 796.50.

Among O&G companies, Bumi Armada Bhd’s share price settled down one sen or 3.45% at 28 sen while Hibiscus Petroleum Bhd declined 1.5 sen or 2.48% to 59 sen.

Globally, it was reported that oil prices dropped more than 1% on Monday after earlier hitting their lowest since July as Saudi Arabia made the deepest monthly price cuts for supply to Asia in five months while optimism about demand recovery cooled amid the coronavirus pandemic.

It was reported that Brent crude was at US$42.21 a barrel, down 45 cents or 1.1% by 0439 GMT, after earlier sliding to US$41.51, the lowest since July 30. It was reported that US West Texas Intermediate crude skidded 51 cents, or 1.3%, to US$39.26 a barrel after earlier dropping to US$38.55, the lowest since July 10.

"The world's top oil exporter Saudi Arabia cut the October official selling price for Arab Light crude it sells to Asia by the most since May, indicating demand remains weak. Asia is Saudi Arabia's largest market by region,” Reuters reported today.

Earlier, Bloomberg reported that Saudi Arabia’s state oil producer Saudi Aramco is reducing pricing for light exports to Asia in October by US$1.40 a barrel to 50 cents below the regional benchmark.

US crude oil prices slipped below US40 a barrel on Friday (Sept 4). Reuters reported that oil prices fell more than 3% on Friday and posted their biggest weekly decline since June as fears of a slow economic recovery from the Covid-19 pandemic compounded worries about weak oil demand.

"Brent crude, the international benchmark, fell US$1.41, or 3.2%, to settle at US$42.66 a barrel. US West Texas Intermediate fell US$1.6, or 3.9%, to settle at US$39.77 a barrel,” Reuters reported.

In Malaysia today, Bernama reported that research houses remain mostly positive on the local O&G industry outlook despite the ongoing volatility of crude oil prices and poor second-quarter financial results posted by several listed O&G companies as well as Petronas.

It was reported that Kenanga Investment Bank Bhd said it is almost certain that the second half of the year will see improved results in comparison to the first half, helped by a mild rebound in crude oil prices post-April 2020 and easing of movement control order lockdowns.

However, production and activity levels are still very unlikely to return to pre-pandemic levels at least for the next 12-18 months, Kenanga said in a statement today.

“As companies are now undergoing cost-saving measures in order to meet debt repayment obligations, we are also expecting more impairments, disposals, refinancing and merger and acquisition (M&A) activities within the sector moving forward,” it said. 

Maintaining its “neutral” call on the sector, Kenanga said it still does not think that pre-emptively buying into the sector to time a recovery is a viable investment strategy at this point in time, at least not on a broad-based approach.

Meanwhile, it was reported that AmInvestment Bank Bhd has upgraded its call on the sector to “overweight” from “neutral” despite the ongoing volatility of crude oil prices as the down cycle may have reached a bottom with the worst experienced in April this year when Brent spot prices temporarily fell to a low of US$14/barrel while futures inverted to an abnormal negative US$38/barrel due to a lack of storage capacity.

“Year-to-date (YTD), Brent crude oil prices have averaged US$42/barrel with spot prices at US$43/barrel currently from the year-low of US$14/barrel on April 22. This is supported by US crude oil inventories declining by 6.0% to 508 million barrels currently from the all-time high of 541 million barrels in June this year.

“Hence, we maintain our crude oil price forecast at US$40–US$45/barrel for 2020 and US$45–US$50/barrel for 2021. For comparison, the Energy Information Administration’s short-term outlook projects crude oil price at US$41/barrel for 2020 and US$50/barrel for 2021,” AmInvestment said in a note.

Maybank Investment Bank Bhd maintained its “positive” call on the sector, given that Petronas’ weak 2Q20 results were expected, and congruous with those of its global peers.

“Given the uncertain outlook, it may not meet its RM24 billion dividend commitment for 2020. There will be no retrenchment for Petronas staff but a salary cut will be implemented across the board,” Maybank was quoted as saying in a note.