How long can the oil price rally last?

Bulls ap­pear to have con­trol of the mar­ket, at least in the short term

The Star Malaysia - StarBiz - - Companies & Strategies - By CE­CILIA KOK ce­cil­i­a_kok@thes­tar.com.my

CRUDE oil prices have held up pretty well over the week. But the ques­tion on how long this will last re­mains.

Ris­ing geopop­lit­i­cal ten­sions in the Mid­dle East have been seen as the main driver of the rise in the price of crude oil over the week.

For in­stance, a tweet from US Pres­i­dent Don­ald Trump in the mid­dle of the week on a pos­si­ble mis­sile strike on Syria in re­sponse to a sus­pected chem­i­cal weapon at­tack in the al­ready war-torn coun­try sent both the West Texas In­ter­me­di­ate (WTI) and Brent crude fu­tures ris­ing to new multi-year highs.

In lev­els last seen in De­cem­ber 2014, WTI for May de­liv­ery hit US$67.45 (RM261.67) per bar­rel on the New York Mer­can­tile Ex­change, while the global bench­mark Brent for June set­tle­ment hit US$72.61 per bar­rel on the Lon­don-based ICE Fu­tures Europe Ex­change on Wed­nes­day in re­sponse to Trump’s tweet.

In a re­cent Bloomberg Tele­vi­sion in­ter­view, In­ter­na­tional En­ergy Agency (IEA) ex­ec­u­tive di­rec­tor Fatih Birol ex­plained:

“The oil mar­kets are very much linked to geopo­lit­i­cal ten­sions, es­pe­cially if they’re in the Mid­dle East, which is the heart of global oil ex­ports.If ten­sions con­tinue, they will con­tinue to have an im­pact on the oil mar­ket and prices. Def­i­nitely, this will be a rea­son to push the prices up,” he said.

While oil prices have since eased from their multi-year high lev­els to­wards the end of the week, the bulls ap­pear to have con­trol of the mar­ket, at least in the short term.

There are fac­tors, such as higher pro­duc­tion of shale in the United States, that could limit fur­ther rise in oil prices.

Bar­clays, for one, says, while oil prices are ben­e­fit­ing from a “per­fect storm” of stag­nant sup­ply, geopo­lit­i­cal risk and a harsh win­ter in the near term, there is a high like­li­hood of a down­ward cor­rec­tion in the se­cond half of 2018.

In its April 12 note, the in­vest­ment bank said geopo­lit­i­cal ten­sions should keep Brent crude above the US$70 per bar­rel level at least up to May be­fore the down­side risk sets in again.

Be that as it may, Bar­clays has raised its 2018 and 2019 Brent crude and WTI av­er­ages by US$3 per bar­rel. It now ex­pects Brent crude to aver­age at US$63 in 2018 and US$60 in 2019, while WTI is ex­pected to aver­age at US$58 and US$55.

Oil bulls, nev­er­the­less, be­lieve oil prices will likely be sus­tained by other pos­i­tive fac­tors.

Geopo­lit­i­cal ten­sions aside, con­tin­ued weak­ness in the US dol­lar; a tight­en­ing oil mar­ket as out­put by Opec (Or­gan­i­sa­tion of the Petroleum Ex­port­ing Coun­tries) de­clines; im­prov­ing de­mand on stronger growth in the global econ­omy; and Saudi Ara­bia’s oil­price tar­get of US$80 per bar­rel should pro­vide ad­di­tional sup­port for oil prices.

Saudi Ara­bia, Opec’s largest pro­ducer and de facto leader, is re­port­edly aim­ing for an oil price of about US$80 a bar­rel to help gen­er­ate higher rev­enue for its gov­ern­ment to fi­nance its in­creas­ingly am­bi­tious do­mes­tic pro­grammes as well as to sup­port the val­u­a­tion of Aramco ahead of the oil gi­ant’s much­hyped ini­tial pub­lic of­fer­ing.

Mean­while, Opec’s oil out­put fell yet again last month on lower sup­plies from Venezuela and Saudi Ara­bia, sug­gest­ing global mar­kets may tighten sharply later this year.

The group’s com­bined out­put was cut by 201,400 bar­rels per day (bpd) in March to the low­est level in a year at 31.958 mil­lion bpd.

Oil de­mand, on the other hand, ap­pears re­silient at 1.65 mil­lion bpd, rep­re­sent­ing an up­ward re­vi­sion of 30,000 bpd from last month’s re­port.

Ac­cord­ing to Bloomberg es­ti­mates, China’s crude im­ports in March rose more than 21% from the pre­vi­ous month to 9.26 mil­lion bpd.

The newswire says lat­est Opec data sug­gest oil in­ven­to­ries could de­cline at a rate of 1.3 mil­lion bpd in the se­cond half of 2018. This would lead to a tighter oil mar­ket, which will help boost prices.

But the more cau­tious view is that higher oil prices could bring about the risk of US shale pro­duc­tion grow­ing at a faster than ex­pected pace.

For in­stance, de­spite Opec pro­duc­tion de­clin­ing in March, to­tal global oil sup­ply ac­tu­ally in­creased by about 180,000 bpd, the bulk of which came from US shale.

This sug­gests that US shale would fill the gap as Opec cuts its pro­duc­tion.

So, un­less the global glut, which re­sulted in the col­lapse of crude oil prices in 2014, is fully elim­i­nated, there will be a limit as to how far the re­cent oil rally could go.

Ac­cord­ing to Hong Leong In­vest­ment Bank an­a­lyst Yip Kah Ming, the re­cent oil rally is not a sus­tain­able, as it is driven pri­mar­ily by geopo­lit­i­cal ten­sions.

“The re­cent run-up is merely a short­term phe­nom­e­non. Go­ing for­ward, the rise in un­con­ven­tional oil pro­duc­tion in the United States (shale) will cause prices to fall back,” Yip says.

He main­tains his oil price fore­cast of around US$55 to US$65 per bar­rel for 2018.

Need­less to say, oil and gas (O&G) stocks on Bursa Malaysia had re­acted pos­i­tively over the week in tan­dem with the spike in global crude oil prices.

Sa­pura En­ergy Bhd was one of the most ac­tively traded coun­ters over the week. In the past five days, its share price had gained 24 sen or 48% to close at 74 sen yes­ter­day. The counter’s gain co­in­cided with its an­nounce­ment of tak­ing a fi­nal in­vest­ment de­ci­sion to de­velop the first phase of the Gorek, Larak and Bakong fields in the SK408 pro­duc­tion-shar­ing con­tract.

Sa­pura En­ergy has part­nered Petronas Cari­gali Sdn Bhd and Sarawak Shell Bhd for this ven­ture.

Other O&G coun­ters that hogged the vol­ume list with up­ward mo­men­tum in­cluded UMW Oil & Gas Corp Bhd, Bumi Ar­mada Bhd and Hibis­cus Petroleum Bhd.

Last month, Af­fin Hwang Cap­i­tal Re­search said value was emerg­ing in O&G stocks, and rec­om­mended a relook into the sec­tor, as earn­ings prospects are im­prov­ing. The bro­ker­age pointed to higher cap­i­tal ex­pen­di­ture (capex) by global oil ma­jors and in­creased in con­tract flows as some of the fac­tors bod­ing well for the O&G sec­tor.

Petro­liam Na­sional Bhd (Petronas), for in­stance, had raised its guid­ance on capex spend­ing to RM55­bil in 2018 af­ter three con­sec­u­tive years of de­cline.

Of the bud­get this year, RM26­bil had been ear­marked for up­stream de­vel­op­ment. Af­fin Hwang Cap­i­tal re­vised up­ward its Brent crude oil price as­sump­tion to fall within the range of US$63 to US$68 per bar­rel, or an aver­age of US$65 per bar­rel, for 2018. This com­pared with its ear­lier fore­cast of US$58 per bar­rel. The bro­ker­age’s long-term Brent crude oil price as­sump­tion stood at US$75 per bar­rel.

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