This article first appeared in The Edge Financial Daily on April 25, 2018
KUALA LUMPUR: Brent crude oil reached a three-and-a-half-year high of US$75 (RM293.25) per barrel yesterday following the 15-month-old supply control by the Opec led by Saudi Arabia, exacerbated by expectations of further tightened supply as the US may impose sanctions against Opec’s third-largest producer, Iran. However, a return to US$100 remains a pipe dream.
At the time of writing, Brent crude oil futures were trading at US$74.82, representing an increase of 45% year-on-year.
ForexTime (FXTM) market research team told The Edge Financial Daily that shrinking oil inventories around the world led by supply cuts by Opec which were introduced in early 2017, coupled with sustained demand from Asia, especially China, have propped up the price over the last couple of weeks.
It warned that although the current price may be sustainable for now, another 10% to 20% spike would risk the global economic recovery.
S&P Global Platts associate editorial director for Asia and Middle East Energy News & Analysis Mriganka Jaipuriyar also concurred. He said the danger now facing the market is that Opec overshoots on tightening the market, which could exacerbate the backwardation in prices, prolong the rally in near-term prices and ultimately erode demand.
Meanwhile, Jaipuriyar noted that US shale oil production is persistently climbing higher, where onshore producers pushed US production over the 10 million-barrels-per-day mark last November for the first time since 1970.
This resulted in a see-saw situation where Opec will want to cut supply to prop up oil price but this will be offset by the increase in US shale oil production. As such, analysts believe that it is unrealistic to expect crude oil to return to US$100-per-barrel level anytime soon.
Brent last hit those levels in September 2014.
“I see oil possibly scaling US$80 per barrel and perhaps even cresting at US$85, but I suspect Russia and other Opec members would argue for supply increases at those levels. Not to mention the big elephant in the room; US shale oil production would ramp up significantly,” futures brokerage OANDA head of trading for Asia-Pacific Stephen Innes told The Edge Financial Daily.
On the flip side, however, the situation in the Middle East is expected to remain a “powder keg” for the foreseeable future, Innes said, thus volatility will continue to maintain at a high level.
Muted response in local O&G counters
Over at Bursa Malaysia, the higher Brent crude oil yesterday was not enough to lure investors back into oil and gas (O&G) counters. Analysts believe that although higher oil prices may improve sentiment on the stocks, it may not necessarily be reflected by the share prices immediately.
“Not many companies on Bursa Malaysia have a direct exposure to the changes in oil price. That is why you don’t see much excitement in these stocks today (yesterday),” MIDF Research analyst Aaron Tan told The Edge Financial Daily.
He said examples of companies that have a direct exposure to the price level as they sell crude oil to the market are Sapura Energy Bhd, Hibiscus Petroleum Bhd and Reach Energy Bhd.
UOB Kay Hian analyst Kong Ho Meng explained that contracts from national oil company Petroliam Nasional Bhd (Petronas) is a better indicator compared to oil price level.
“Increase in oil price level will have to go through many layers until it translates into more jobs for O&G service providers, which will then lead to better earnings, and then higher share prices,” he said.
“So, as long as there are no changes from Petronas point of view, I don’t think there will be any changes in the share prices of O&G stocks,” Kong added.
Kenanga Research analyst Sean Lim said, however, the surge in oil price levels has reinforced the increased job awards as announced by Petronas for 2018.
“If this current oil price level is sustained for at least the next six months, we can expect an even better outlook for O&G service providers as Petronas will make some upward revision to their current projects,” he added.