Mixed views on oil prices

Analysts are divided on direction of crude in the second half of the year

PETALING JAYA: Analysts are split on whether crude prices will improve in the second half of the year as oil prices continue to be under pressure from the persistent oversupply situation, made worse by a surprise increase in US petroleum stocks last week.

Along with the increase in stocks, data from the US Energy Information Administration (EIA) also showed that gasoline inventories were higher, indicating slowing demand.

It had been earlier predicted that oil prices would pick up during the later part of the year, with research houses such as Citi saying crude oil prices could shoot up to US$70 a barrel by the end of 2017 as supply and demand levels continued to rebalance.

Oil prices were hit last week after the unexpected rise in US petroleum stocks, with Brent crude falling 4.1% to settle at US$48.06 a barrel after the data was released, the lowest close since November last year.

Earlier in the week, diplomatic tensions broke out between Qatar and other Middle Eastern nations, leading to seven countries severing diplomatic ties with Qatar.

Oil prices initially rallied, pushing Brent crude prices up as much as 1.6%, but later fell as markets reassessed that Qatar was a small crude producer.

MIDF Research’s oil and gas (O&G) analyst Aaron Tan noted that the recent developments in the Middle East were at a political level, while at the ground level, it was still business as usual, and the trading of O&G continued.

The country produces about 600,000 barrels of oil per day, which is similar to the rate of production in Malaysia, and is one of the Organisation of the Petroleum Exporting Countries’ (Opec) smallest in terms of crude output.

“There was worry that the issues between the Arab nations could curb the agreement between Opec countries to cut production,” he said.

On the US stockpile increase, Tan noted that the advancement in technology had allowed companies to increase oil production with minimal cost.

The average cost of production is currently at US$39 per barrel, which allows producers to make good profit, and they churn out about 9.3 million barrels per day.

The EIA has forecast that the country’s crude oil production would reach a record annual average of 10 million barrels per day in 2018. The country’s previous record was 9.6 million barrels a day in 1970.

“We continue to maintain our outlook for Brent crude oil at an average of US$50 per barrel this year, and we have maintained this since late 2016.

“We believe the fundamental issues still prevail, and that there is still a fair bit of oversupply in the global market,” he told StarBiz.

In the second half of the year, he said, oil would continue to trade sideways from its current level, in the range of between US$48 and US$52 per barrel.

Tan said said they remained negative on the upstream players.

“The bulk of Petroliam Nasional Bhd’s (Petronas) spending in the near term is likely to be focused on the downstream segment, particu- larly in its Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang, Johor.

“In line with this, we are positive on the downstream segment and our top picks are Petronas Dagangan Bhd and Gas Malaysia Bhd,” he said.

Kenanga Research analyst Sean Lim, however, said it was still hopeful of the price recovery in the second half of the year.

He noted a possibility that Opec could revise its current proposal and consider a deeper cut, in view of the latest developments and if the weakness in the oil price continued.

“On the other hand, we believe all the good news has already been priced in, and any bad news will weigh on oil prices.

“More aggressive measures are needed to help boost prices, and improved demand could also help the situation,” he said.

On the situation in the Middle East, he said the firm viewed it as a temporary issue.

“Geopolitical tensions are not likely to affect Qatar’s Opec agreement.

“If the situation escalates, then we will see more fear – it depends on what happens moving forward. We really have to wait and see. At present, we are still of the view that the second half would be better,” he said.

Although Petronas’ first quarter of financial year 2017 (Q1’17) core earnings improved by 25% year-onyear on higher averaged realised prices, it was down 15% quarter-on-quarter dragged by higher amortisation, net forex loss and tax expense.

Steady cash flow from operations and improving earnings before interest, tax depreciation and amortisation also strengthened the group’s net cash position to RM59.2bil.

“Even so, we believe Petronas is still embarking on tight cost optimisation, as evident by another round of service rate renegotiations in the beginning of the year.

“Capital expenditure (capex)wise, we believe higher priority will be given to the downstream segment, particularly on the Rapid project in the near term,” he said.

On another matter, Lim said despite the slight disappointment from Opec’s decision to maintain its output cut, which could cap oil prices at a lower range of US$48 to US$52 per barrel in the near term, he did not discount the possibility of further price-propping actions led by the Saudis ahead of valuations

for oil giant Saudi Aramco’s initial public offering.

He said the research house has reiterated its “neutral” call on the sector and remains bullish on floating production storage and offloading players such as Bumi Armada Bhd and Yinson Holdings Bhd, and also services players like Dayang Enterprise Holdings Bhd and Uzma Bhd, which are potential beneficiaries of a new round of contract awards.

Maybank Investment Bank Research, however, remained positive on the sector, saying volatility has receded, confidence has improved and costs have reset.

In a report on the sector, the research house said Q1’17 results were largely in line and that it expected the momentum to pick up in the second quarter.

“The sector is on a cyclical recovery, as the oil market rebalances and capex grows. We remain positive on the sector,” it said.

The research house said its key “buy” calls were Sapura Energy Bhd, Yinson, Dialog Group Bhd and Wah Seong Corp Bhd.

It has also maintained its US$53 per barrel average oil price estimate for 2017.

“We expect stronger quarters ahead, as the sector moves into high-productivity periods. Opec and non-Opec members’ recent extension of production cut to June 2018 is market-neutral, but the commitment to drive down global stockpile is commendable, reflecting strong compliance and collaboration among members,” it added.

On the domestic front, it noted that Petronas’ RM60bil capex commitment for 2017 was a positive.

“We are slowly seeing a revival in upstream activities such as drilling works,” it added.

On its top picks, it said Sapura Energy was a direct proxy to a recovering O&G sector.

“Monetising its gas assets is a catalyst not fully priced in yet,” it said.

As for Yinson, it said the company’s undemanding valuations, strong earnings growth prospects, cashflow strength and proven execution capabilities were positives. “Its readmission as a syariah-compliant stock is another positive,” it said.

Dialog, it noted, was a direct proxy to Petronas’ Rapid and Pengerang play and boasted a steady, long-term growth story with much upside potential.