Low oil prices could persist for several months
KUALA LUMPUR: On the back of the Russian-Saudi Arabia oil dispute, and coupled with the Coronavirus Disease 2019 (Covid-19) wreaking global oil demand, the current low oil price environment could persist throughout the remaining months of 2020 before rebalancing in 2021, analysts observed.
Kenanga Investment Bank Bhd’s research team (Kenanga Research) highlighted this in a recent report, and noted that the excess oil production coupled with diminished demand has led to an oversupply, resulting in a shortage of storage spaces globally.
“Our findings suggest that current oil prices are oversold on a longer-term view, as production of oil at current oil prices will not be able to meet global demands by 2023.
“However, we believe that this low price environment could persist for the coming months while the market goes through some rebalancing,” it said.
With Russia and Saudi, as well as many other oil production nations flooding the market with supply, we have reached a point whereby storage spaces are starting to run out globally, as reported in recent news updates.
“According to EIA forecasted numbers, global oil markets are expected to continue to be in a state of oversupply throughout 2020, before rebalancing happens in 2021,” Kenanga Research said.
“Meanwhile, should oil prices continue to remain at current levels, production of less than US$40 per barrel breakeven oil would be insufficient to meet global demands by 2023, according to Rystad Energy.
“In essence, this means that either one of the two things have to happen in the longer-term; oil prices have to rebalance back to around US$60 per barrel mark in order for supply to be able to meet demand, or costs structures in the industry would need to be massively more efficient to bring down breakeven prices of new oil.
“Although these findings seem to suggest that current oil prices are undeniably oversold in the longer-term, we believe it also infers that current volatilities will still persist at least for the coming months,” it explained.
Overall, it retained its in-house 2020 average Brent crude price assumption of US$40 per barrel, expecting it to hover at around US$30 per barrel level in the second quarter of 2020 (2Q20).
Meanwhile, on activities in the oil and gas (O&G) sector worldwide, Kenanga Research noted that amidst the weak oil prices, a slew of oil producers globally have announced reduction in capital expenditure, as well as delaying greenfield projects.
“This is another indication that oil majors globally are gradually preparing themselves for an extended period of low oil prices,” it said.
“As such, locally, we would not be surprised if Petronas adopts a similar approach in slashing its capital expenditure (capex) budget and deferring any nonessential greenfield projects.
“While production levels are unlikely to be cut back, costs optimisation would be given high priority for continuing brownfields,” it added.
All in, Kenanga Research maintained its ‘neutral’ view on the sector as it believe continued macro-environment uncertainties might continue to spur volatilities in the stock market.