Higher crude prices lift Bursa Energy Index

Interest rate hike will still determine market direction

“We believe PETRONAS will renegotiate its rates on contracts with the service providers which should allow them to perform better.” Vincent Lau

PETALING JAYA: The decision by the Organisation of the Petroleum Exporting Countries and allies (Opec+) to cut production to ensure crude oil prices stay elevated will also ensure there’s no let up in inflationary pressures and see most central banks remain in a tightening bias in the immediate future.

The cartel decided to cut production by 100,000 barrels a day, which is 0.1% of total global demand, to defend prices on concerns that demand will fall as major economies buckle under higher interest rates and China’s zero-covid policy.

The decision could also ensure a pivot in the stance of the Federal Reserve at its meeting on Sept 20 as it remains elusive and keep equity markets in a bearish mode heading into the final quarter of the year.

The Brent crude futures contract for November delivery rose almost 3% yesterday to US$95.75 (RM429) per barrel on the Opec+ move while Bursa Energy Index gained some 20 points or 2.96% to 721 points. The index is up some 100 points since mid-july.

“There will be no major impact from the move on local sector related companies but crude oil prices at US$85 to US$90 (RM381 to RM404) per barrel are more sustainable for all.

“We believe PETRONAS will renegotiate its rates on contracts with the service providers which should allow them to perform better,” said Vincent Lau, head of equity sales at Rakuten Trade Sdn Bhd.

With a lack of trading ideas ahead of Bank Negara’s Monetary Policy Committee (MPC) meeting tomorrow, investors snapped up energy stocks like Bumi Armada Bhd (up

three sen to 42.5 sen), Dayang Enterprise Holdings Bhd (up nine sen to RM1.14) and Coastal Contracts Bhd (up eight sen to

RM1.91).

While the higher crude price would benefit upstream companies like PETRONAS, Dagang Nexchange Bhd and Hibiscus Petroleum Bhd, analysts say it won’t have a major direct impact on support service providers immediately.

As service providers, most of the local listed oil and gas-related companies are highly reliant on projects on hand which are highly dependent on the capital expenditure (capex) of upstream exploration and production players.

The oil and gas industry has been out-offavour with investors in recent years in tandem with environmental mandates-caused under investment for years. Some do not expect that to change anytime soon.

“The prior under investment will take years to rectify and greater investment is needed to grow the supply and de-bottleneck the system to accommodate demand growth.

“Environmental, social and governance concerns continue to prevent companies from investing in this space, and we do not foresee those investments will start flowing into this sector, ensuring a persistent supply deficit,” said Jason Wong, research manager at ifast Capital.

He added oil and gas is a capital-intensive sector as projects run are large in scale, and access to financing is crucial for the sector to operate.

“This can be reflected in the relatively higher gearing ratio among top 10 players in the Bursa Energy Index.

“That said, a higher cost of debt capital, with a widely expected rate hike from Bank Negara, might potentially impede the ability of companies to cover operating expenses and that can erode earnings further,” he warned.

While the bearish global markets may trend lower ahead of the Federal Open Market Committee (FOMC) meeting, the overnight policy rate (OPR) decision tomorrow could provide strong support for the local market.

Lau said investors have already priced in a 25-basis points (bps) hike by Bank Negara on the day which should further help attract funds into banking stocks, whose weightage account for over 30% of the FBM KLCI.

“We expect a 25bps hike this week and a further 25bps on the next MPC meeting. The higher OPR should benefit banking stocks with higher net interest margins at the expense of Reits,” said Lau.

The flow of funds into bank stocks should limit any downside to the outcome of the FOMC meeting, he added.

Banks are projected to have better earnings guidance this year thanks to the lower loan loss provision with the winding down of various assistance programmes.

Wong said Bank Negara has the room to hike rates amidst the rejuvenating economic data, including positive gross domestic product growth and the lower unemployment rate.

“With the rising inflation, it is crucial for Bank Negara to take proactive measures to reverse the negative real interest rate environment as this could erode consumer spending power in the long term,” he said.