Oil’s delicate balancing act to sustain current price uptrend
KUCHING: Analysts project for oil prices to be in a delicate balancing act to sustain the current uptrend as they continue to see many uncertainties surrounding oil’s supply side.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) gathered that after the turmoil last year for oil prices, Brent crude prices have rebounded and are currently hovering at around the US$50 per barrel mark.
“This was largely helped by the expected recovery in oil demand amidst vaccination programmes worldwide, coupled with the Organization of the Petroleum Exporting Countries’ (Opec) continued efforts in limiting production output,” Kenanga Research said.
“Nonetheless, moving forward, we see oil prices to be in a delicate balancing act to sustain the current uptrend. While demand is almost certain to recover going into 2021, we still see many uncertainties surrounding the supply side of oil.”
According to the research arm, these include the question of Opec sustaining current production cuts, as it now practices a monthly review system amidst deep tensions and disagreements among member nations.
It also takes into account the resurgence of Libya oil, which may add up to 1.3 million barrels per day (bpd) of global oil output, a possible lifting of Iran sanctions under the Joe Biden administration, which may reintroduce another one million bpd of oil exports and a possible resurgence of shale oil production, should oil prices breach past its breakeven point of approximately US$55 per barrel.
All in, Kenanga Research opined that sustained Opec production cuts at current levels are imperative to prolonging the current stability in oil prices, although we suspect this to be highly unlikely throughout the course of the year.
“The International Energy Agency (IEA) had also reiterated a similar view that existing inventory overhang could linger until the end of the year if Opec turns on the tap, even without fresh surplus during the year.
“As such, we retain our 2021 average Brent crude price assumption of US$50 per barrel.”
Overall, while a recovery is expected to be underway, Kenanga Research believed this recovery trajectory will slow and gradual.
“From our read-through of the recently-announced Petronas Activity Outlook 2021-2023, we gathered that overall activity levels are still expected to stagnate for the coming year, as most of the value chains are expected to see flattish or lower activity levels in 2021, from 2020.
“This somewhat downplays the possibility of a recovery to pre-pandemic activity levels during the year, amidst Petronas’ increased prudence in spending given its dwindling net-cash position, coupled with increased tax and dividend commitments.
“From Petronas’ activity outlook, while no particular subsector emerged as a clear winner, we see the brownfield space as a potential partial winner as it benefits from increased activities across various value-chain - for example, increase in hydraulic workover unit demand, wells decommissioning and services.”