KUALA LUMPUR (March 31): RHB Research on Thursday (March 31) raised its 2022 to 2024 Brent crude oil price forecasts to US$104 (about RM437.11), US$85 and US$75 per barrel, from US$90, US$75 and US$70 per barrel respectively, to reflect continuous uncertainties from the Russia-Ukraine conflict and stretched spare capacity of the Organization of the Petroleum Exporting Countries (OPEC).
RHB analyst Sean Lim said in a note that his base case assumed a protracted crisis with the conflict contained within the Ukrainian borders and that Russia does not weaponise its oil and gas resources and supply to Europe.
“We have assumed a two to 2.5 million barrels per day (mbpd) Russian oil disruption until end-2022 and oil prices are projected to average at US$100 per barrel in the second half of 2022 given that the Organisation for Economic Co-operation and Development (OECD) inventory is expected to stay at the 2010-2014 average level."
Meanwhile, the analyst believes that OPEC is likely to stay intact, and the current production ramp-up schedule will allow OPEC+ members to increase their output and capitalise on the higher oil prices.
“The gap between OPEC+ output and its target levels swelled to 1 mbpd in February. With that, the oil market is theoretically estimated to have an average surplus of 0.2 mbpd in 2022,” he said.
He noted, however, that the downside risks are a full-scale lockdown in China and the lifting of sanctions on Iran.
“On the flip side, a full-blown ban on Russian oil by European countries would send prices to an unprecedentedly high level of US$150 per barrel and the unstoppable price trend would eventually heighten global recession risk,” he said.
Lim also believes elevated oil prices would bode well for sector recovery with anticipation of higher capital expenditure (capex) and operating expenditure spending by clients.
He maintained "overweight" on the oil and gas sector.
While Petroliam Nasional Bhd (Petronas) has been underspending below its planned annual capex of RM40 billion in the past two years at only RM30.5 billion to RM33 billion in 2020-2021, the analyst opined that the firm could boost its capex spending to RM40 billion to RM50 billion this year, riding on stronger oil prices.
He also opined that maintenance related players are likely to recover faster than fabricators given that Petronas is not aggressively expanding greenfield projects, but is instead focusing on low-hanging fruits to boost production.
“We remain bullish on FPSO (floating production storage and offloading) players for robust demand and resilient earnings — Yinson Holdings Bhd (target price [TP]: RM6.49) is now our sector top pick. The potential award of the Safina project could benefit shipbuilders and offshore service vessel players,” he said.
For the downstream sector, the analyst continues to like Petronas Chemicals Group Bhd (TP: RM10.86) as the firm continues to benefit from strong average selling prices given its unique feedstock arrangement with Petronas, offering competitive feedstock costs.
Meanwhile, Bumi Armada Bhd (TP: 65 sen) remains his small- to mid-cap pick due to its earnings resiliency amid undemanding valuation.