O&G counters ride on strong crude oil prices

TheEdge Wed, Sep 18, 2019 08:55am - 4 years View Original


KUALA LUMPUR: The sudden surge in crude oil prices fuelled trading interest in oil and gas (O&G) stocks on Bursa Malaysia yesterday.

“We are upbeat on global oil prices in the short run as the (Saudi Arabia’s) disruption may take longer than expected given Saudi’s less optimistic view of a full-production resumption over the near term,” said Affin Hwang Capital analyst Tan Jianyuan in a research note yesterday.

He added the supply disruption of this scale should result in more bullish sentiment for Brent prices and the sector in the near term, putting O&G stocks under the spotlight.

Against this backdrop, O&G stocks were riding on the positive sentiment on oil prices, but it is not known how long the optimism would last.

At press time, Brent crude was down 6% to US$64.48 (RM269.53) per barrel as Reuters, citing sources, reported Saudi Arabia was close to restoring 70% of its oil production.

An analyst said the main concern now is how long Saudi Arabia will take to fully restore its production. He sees some upside for oil prices if the production cannot be fully restored within the stipulated timeframe. However, he said any large upside in prices is unlikely.

“I do not think oil prices will hit US$80 per barrel; one reason is the prices have corrected after US President Donald Trump authorised the use of oil from (the country’s) emergency reserve following the incident.

“I am hoping oil prices stay above US$60, and generally, crude oil prices tend to stay higher in the fourth quarter due to better consumption,” he added.

Likewise, Areca Capital Sdn Bhd chief executive officer Danny Wong foresees oil prices sustaining above the US$60 level pending the development of oil recovery from Saudi Arabia’s facility.

Wong views current oil prices as “reasonable. “I do not expect oil prices to shoot up further unless there is more threat to Saudi Arabia as demand is not strong due to consumption from China, India and Indonesia [having] slowed down,” he added.

However, UOB KayHian is more optimistic about oil prices.

“O&G sector sentiment could see the positive trading range. The higher geopolitical risk premium is positive for oil prices which had undershot the US$65-75 per barrel expectations for 2019.

“Despite talk of releasing ample oil inventory to cushion supply shortage, oil prices could move up on a sustained uptrend and may test the next upside at US$80 per barrel levels. If so, this provides a positive trading valuation angle for upstream O&G stocks,” it said.

UOB KayHian expects upstream oil producers like Hibiscus Petroleum Bhd, Reach Energy Bhd and Sapura Energy Bhd to benefit directly from Saudi Arabia’s supply disruption.

Besides upstream oil producers, the research house said petrochemical stocks could experience feedstock disruptions from the supply disruption.

As such, Petronas Chemicals Group Bhd and Lotte Chemical Titan Holding Bhd are beneficiaries as chemical prices may experience upside volatility, given that Saudi Arabia’s disruption’s effect on the petrochemical space is more pronounced at up to 9% of total global capacity (versus 6% for crude oil production), said UOB KayHian.

In the downstream sector, Petronas Dagangan Bhd, Petron Malaysia Refining & Marketing Bhd and Hengyuan Refining Co Bhd could benefit from inventory lag gains on sustained oil price uptrend in their profits, versus lag losses in the second quarter of 2019 through the third quarter of 2019.

Yesterday, Brent crude futures were down 1.58% to US$67.93 a barrel, while US West Texas Intermediate futures declined 1.62% to US$61.88 a barrel, according to Bloomberg.

On Monday, Brent crude futures rose as much as 19.5% to US$71.95 per barrel at the open, the biggest jump on record. The contract closed the session up US$8.80 or 14.61% at US$69.02.

Meanwhile, US West Texas Intermediate futures climbed as much as 15.5% to US$63.34, the biggest climb since December 2008. The contract settled at US$62.90, up US$8.05 or 14.67%.

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