This article first appeared in The Edge Financial Daily on March 10, 2020
KUALA LUMPUR: Investors can expect volatility to be the prevailing theme to dominate oil prices in the near term, as oil producers are expected to follow up on the move by Saudi Arabia to slash prices and increase production to flood their competitors.
The Brent crude oil price touched a low of US$31 (RM130.51)/barrel yesterday — a level last seen in 2016 when Saudi Arabia pushed the market into oversupply, driving prices down to levels that are uneconomical for US shale producers to continue to operate.
This was after talks collapsed between Saudi-led Opec and Russia, as Moscow said no to deeper production cuts to stabilise prices after the current agreement expires at the end of this month.
When contacted by The Edge Financial Daily, Refinitiv oil research and forecast director Yaw Yan Chong opined that for the short term, the market has already seen the floor at current price levels.
“I would caution that there will be a lot of volatility in the interim until the situation stabilises as far as output is concerned,” Yaw said.
“Other Opec members have yet to show their hand but it is likely that they will follow Saudi Arabia’s lead and cut their OSP (official selling price) and raise output. Likewise, the Russians who have always been uncomfortable about the production cuts and never kept to their mandated quotas,” Yaw added.
“I would argue that such a move, to raise output indiscriminately, would benefit nobody, and that the world’s major producers would eventually have to come back to the table.
“The question is how long this impasse is going to last, versus how long Covid-19 will remain a dampener on oil demand. My take is that the producers will come to some kind of agreement sooner rather than later, as this impasse is hurting them for as long as it goes on,” he said.
Sour sentiment pushes O&G stocks to fresh lows
Brent’s free fall came after Saudi Arabia sharply cut its premiums to the OSP by US$6 to US$8/barrel, to be followed swiftly by plans to raise production by up to an additional two million barrels per day — or some 2% of global demand.
The latest oil price war has sent investors scrambling away from oil and gas (O&G) equities yesterday, putting an abrupt end to optimism about the sector’s growth prospects in 2020.
A significant number of O&G stocks hit limit down on heavy selling pressure yesterday, dragging down several of them to multi-year lows, and prompting Bursa Malaysia to halt short selling of several counters. Petronas counters were the second and third largest decliners on Bursa Malaysia, namely Petronas Chemicals Group Bhd (down RM1.25 or 22.12% to RM4.40) and Petronas Dagangan Bhd (down RM1.18 or 5.34% to RM20.90).
Profit taking also occurred at the sector’s top picks, including Bursa’s fourth largest decliner Yinson Holdings Bhd (down RM1.01 or 14.41% to RM6), MISC Bhd (down 75 sen or 10.14% to RM6.65), Serba Dinamik Holdings Bhd (down 42 sen or 18.5% to RM1.85), and Dialog Group Bhd (down 26 sen or 7.9% to RM3.03).
The actives were led by Sapura Energy Bhd, Velesto Energy Bhd and Bumi Armada Bhd. All three counters touched record lows, before paring some losses alongside a slight rebound in oil prices.
Sapura Energy closed 5.5 sen or 34.38% lower at 10.5 sen, after touching a record-low of eight sen earlier. Velesto Energy last traded 14.5 sen or 48.33% lower at 15.5 sen, having touched 14.5 sen, while Bumi Armada closed 12 sen or 42.86% lower at 16.5 sen after rebounding from 12.5 sen.
Others which touched record lows due to the recent sell-off included Alam Maritim Resources Bhd, Coastal Contracts Bhd and Uzma Bhd.
Analysts downgrade sector, slash oil price forecasts
Safe for production companies and companies with high overseas exposure, the prospects local-listed O&G services companies are closely linked to the capital expenditure (capex) allocation of Petronas, being the sector’s regulator in the country.
Last month, Petronas laid out its plan to increase domestic capex to RM26 billion to RM28 billion in 2020 with an emphasis on the upstream segment, alongside plans to lift production by 5% year-on-year.
Refinitiv’s Yaw, when asked on the subject of whether oil majors will cut spending due to the price pressure, said: “It remains to be seen, and will depend on the duration of this double-whammy of poor demand and oversupply.
“My view is that they would have to, if this lasts beyond the next three to six months,” he added.
Amid heavy selling pressure on stocks, analysts have undertaken a downward revision on the sector that had enjoyed a path to recovery in 2018 to 2019 on the back of domestic capex spending by Petronas particularly in the upstream segment.
Ambank Research downgraded the sector to “underweight” from “overweight”, with the expectation that the new price war impact will exceed the 2014 to 2017 downturn due to higher US shale output and slower demand from China the Covid-19 at present.
The research house has also revised the fair valuation on the sector as a result, adding that an oil price crash is a prelude to the curtailment of the O&G services segment.
“Even though offshore projects have four to five years of gestation cycles, a sharp drop in oil prices will raise credit risk premiums while banking institutions tighten lending criteria to the local services sector, effectively prolonging or even derailing the final investment decisions of oil majors in the near to medium term, as demonstrated by the disruptions in the 2016 to 2018 period,” said the research house, which has revised its Brent forecast in 2020 to between US$40 to US$45/bbl.
Meanwhile, Public Investment Bank Research has downgraded the sector to “neutral” from “overweight”.
“We ascribe 40% to 60% discount stock valuations due to these new operating dynamics which is likely to pressure earnings and stock prices in the near term,” said the research house.
Separately, CGSCIMB Research has maintained “overweight” on the sector “but highlight risks from the free fall in crude oil prices”, as it revised its oil price forecast to US$40 to US$45/bbl.
Among the stocks covered by CGSCIMB, the research house pointed out that the oil price plunge could be neutral to floating assets players like Yinson and Bumi Armada given their long-term contracts.
“But the experience of 2014 to 2016 shows that contracts can fail to perform if the charterer is weak,” said the research house.
Potential gainers from the price slump, it opined, may include Dialog, which may see higher utilisation of its storage tank assets when there is oversupply and weak demand for oil.
“Lotte Chemical Titan Holding Bhd may benefit from margin expansion as naphtha feedstock prices will likely fall faster than the already-depressed petrochemical selling prices,” said the research house.
On the other hand, TA Research has maintained a “neutral” call on the sector but with revised oil price forecast to US$55/bbl, from US$60/bbl previously.
The research house pointed out that the Opec+ talks deadlock is its first time since its establishment in 2016.
“As such, we believe that oil markets will reel back on the possibility of a permanent collapse to Opec+. We believe that the industry had previously taken comfort in Opec+’s commitment to regulate oil markets via proactive market intervention,” said TA Research.
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