Mixed outlook on local O&G industry
Recovery in prices stalled on resurgence of Covid-19
PETALING JAYA: A fresh wave of coronavirus (Covid-19) cases could see prolonged low crude oil prices as demand for fuel is plunging due to longer movement restriction globally.
Brent crude oil slid 68 cents to US$43.47 a barrel yesterday, while the US crude oil West Texas Intermediate (WTI) fell 65 cents to US$40.36 after two weeks of rally.
Crude oil prices have been on a threemonth rally on improved sentiment but oil prices have been stuck near US$40 per barrel as the recovery in prices have been stalled on concerns that Saudi Arabia may cut its selling prices and the resurgence of Covid-19 infections cast doubt about sustained recovery in oil consumption.
Analysts are mostly mixed on their outlook of the local oil and gas (O&G) industry, especially with better-than-expected data on manufacturing activity in China, Europe and the US showing factories’ output recovering.
Rakuten vice-president of equity research Vincent Lau said crude oil prices could surge above US$50 per barrel by the year-end as economic activity picked up and as demand improved due to winter season.
“The recovery in crude oil prices could take a slightly longer time to recover due to the fresh wave of Covid-19 cases.
“But encouraging manufacturing numbers from China and the US as well as improving economies are supporting the demand for oil in the near term,” he told Starbiz.
At the same time, several countries such as Spain and Germany have started to tighten up their movement restriction to cool down hotspots due to fear of a second wave pandemic.
In addition, cities like Beijing and Melbourne are tightening lockdowns to battle new infections.
“We reiterate our cautious view on the outlook for the O&G industry for this year on the recent resurgence of new Covid-19 cases in many countries and a potential second wave,” said MIDF Research analyst Noor Athila Mohd Razali to Starbiz.
She said a slow economic recovery, coupled with negative Covid-19 news, would continue to impact the recovery of crude oil prices.
“If Covid-19 cases remain elevated, it could also potentially derail the demand recovery for crude and crude-related products,” Noor Athila said.
However, despite expecting demand to sluggishly recover and the global oil price to remain at the current level, Athila reckoned that oil majors are unlikely to further cut their capital expenditures (capex) for this year.
“The impact will be on new contract awards and extensions which are expected to be delayed to 2021. We anticipate some margin compression for current work orders as oil majors remain cost sensitive,” she said.
Earlier, oil majors such as Exxon Mobil, Royal Dutch Shell, Saudi Aramco and Petrobras had cut their 2020 capex by 20%30%.
National oil company Petroliam Nasional Bhd (Petronas) has slashed its capex for this year by 21% from the initial estimate of around Rm50bil as it faces challenges driven by the pandemic outbreak that has led to a supply-demand shock.
With the bleak outlook of the O&G sector, Aminvestment Bank said new contract awards to Malaysian operators in the first half of the year dropped 62% year-on-year to Rm2.2bil, with the worst fallout yet to come in the second half onwards.
The research house expected the earnings of upstream players to be worse than the previous 2015–2017 oil price rout due to continuous low oil prices.
It gave a “sell” call on Bumi Armada, Sapura Energy and Velesto Energy and “buy” recommendations on Dialog Group and Serba Dinamik Holdings.
With the withdrawal of the court cases between Petronas and Sarawak state, Aminvest believed Petronas may have to bear up to Rm2.5bil in additional tax annually from east Malaysia that would vary according to crude oil and natural gas prices.
“This represents 6% of Petronas’ financial year 2019 (FY19) core earnings and 3% of net cash of Rm88bil.
“Based on Petronas’ FY19 capex of Rm47.8bil, the additional sales tax that could be imposed by the east Malaysian states translate to 7% of FY20 forecast capex of Rm38bil,” it said.