Tighter Supply from OPEC, “Overweight” on Oil & Gas Sector: RHB IB

The OPEC+ production cut will tighten supply, but investors should be wary that any potential “strong response” from the US could raise tensions. The theoretical deficit is estimated at 0.9mbpd (million barrel per day) for 4Q22, and average at 0.5mbpd for 2023. Despite revising its numbers, RHB Research still maintains relatively lower YoY projections for 2023-2024, due to the uncertain economic outlook. In its Regional Sector Update, the research house has maintained “OVERWEIGHT” on Oil and Gas sector.

However, RHB Research has adjusted its Brent crude oil price forecasts for 2022, 2023 and 2024 to USD102/bbl, USD90/bbl and USD80/bbl. Following OPEC+’s decision to cut production by 2mbpd (which will take effect in November), it is expected that oil prices to average at USD98/bbl in 4Q22, bringing the full-year average to USD102/bbl. Despite lower adjustments in 4Q22, the research house lifts its 2023 and 2024 projections by USD5/bbl to impute the tighter supply from OPEC+ and lower-than-expected US production. Having said that, the actual supply cut is likely to be smaller (estimated at c.1mbpd), in the view of the research house, as many OPEC producers have not met their production quotes in the past few months due to capacity constraints and under-investment in upstream assets.

US to review “response options”. Following OPEC+’s decision, the US is now reviewing its “response options” and will also consult with the US Congress to reduce OPEC’s control over energy prices. While its Strategic Petroleum Reserve (SPR) stock level is at multi-decade lows, one of the potential actions to be taken by the US is to enable antitrust lawsuits against OPEC for anticompetitive behaviour. The No Oil Producing and Exporting Cartels (NOPEC) – which passed a Senate committee back in May – could be on the cards again. The research house does not discount the possibility of a new round of diplomatic squabbles to be triggered, as Saudi Arabia once threatened to trade oil in other currencies if the US passed NOPEC back in 2019. As such, oil prices could be extremely volatile, and swing both ways – depending on how OPEC would retaliate.

Russia’s output remains solid. Upstream reported that the EU has targeted Russia’s seaborne oil exports with a new set of sanctions, including a ban on the maritime transport of Russian oil to third countries – where crude oil is priced higher than the oil price cap agreed upon earlier by the Group of Seven (G7) country members. Citing unnamed sources, the Moscow business daily Kommersant reported that Russia’s oil output increased by 3% YoY between January and September, and current crude oil and natural gas condensate production is at 10mbpd and 0.7mbpd, which is comparable to levels recorded in July. This also implies that Russia will not be affected by OPEC+’s decision, as the former is already producing below what is newly required. Overall, it is believed the impact of the EU sanction will be partially cushioned by stronger take-up rates from Asia, including China and India, which may leverage on the heavily discounted prices.

Top Picks of the sector are: Bumi Armada, Coastal Contracts, Yinson, PTT Exploration & Production (PTTEP) and PTT Oil and Retail Business (PTTOR).

Top Picks (Stock Code) – Target Price
PTT Exploration & Production (PTTEP TB) – BUY THB177.00
PTT Oil & Retail Business (OR TB) – BUY THB35.00
Bumi Armada (BAB MK) – BUY MYR0.59
Coastal Contracts (COCO MK) – BUY MYR2.35
Yinson (YNS MK) – BUY MYR2.91

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