KUALA LUMPUR: Analysts see a downside for Brent to go as low as US$30 per barrel following the fallout between Russia refusal join the Organization of the Petroleum Exporting Countries (OPEC) on Friday in a large production cut as the coronavirus continues to slow the global economy and, with it, demand for oil.
OCBC Treasury Research said although Russia has a higher marginal cost of oil production than Saudi Arabia, it has budgeted a fiscal breakeven of US$42 per barrel – almost half of Saudi Arabia’s US$83 per barrel.
“This has allowed Russia to beat Saudi Arabia at its own game, despite being strong-armed by OPEC to cut production leading up to last Friday’s OPEC+ meeting.
“The average cost of production in OPEC is about US$30 per barrel, which is where we expect Brent prices to fall to in the short-term,” it said in a note today.
Oil futures suffered their biggest daily loss since 1991 on Sunday after Saudi Arabia slashed its official selling price (OSP) and announced plans to raise crude production significantly, signalling the start of a price war.
Those moves came after Russia on Friday baulked at OPEC’s proposed steep production cuts to stabilise prices hit by the economic fallout from the Covid-19 coronavirus.
OCBC said with the two biggest oil-producing members backing out of the supply cuts, other OPEC+ members are almost certain to follow.
This means the reduction of the 2.1 million barrel per day (mbpd) oil supply since 2019 will return to the market almost overnight beginning April 1, 2020, as members all scramble for market share.
“In a more pessimistic scenario, prices remain around US$30 per barrel for an extended period (more than 12 months).
“Russia and Saudi Arabia flood the market with crude oil while the coronavirus situation takes longer than expected to abate. Prices start to correct as demand-supply forces balance themselves but that will take time, possibly a year or more,” it said.
Public Investment Bank Bhd (PublicInvest) said the undesirable development has caught many by surprise as the market had been anticipating the collaboration to continue with additional cuts of between 1.0 and 1.5 mbpd.
“We are near to mid-term negative on the sector, with this heightened level of uncertainty particularly on the supply side amid the coronavirus outbreak,” it said.
PublicInvest has downgraded the oil and gas (O&G) sector to “neutral” with Serba Dinamik Holdings Bhd and Dialog Group Bhd as only preferred picks.
Meanwhile, the implications are generally negative for the Malaysian O&G sector.
It said in the 2014-2016 oil price downturn, Petroliam Nasional Bhd (Petronas) cut its operating costs at the expense of its suppliers and contractors.
Velesto Energy Bhd was hit badly as its long-term rig charters were prematurely ended by Petronas. For the financial year 2020, Velesto has four rigs chartered to Petronas that are due for renewal and these may not be renewed at our assumed higher rate of US$75,000 per day versus US$70,000 per day currently.
It said Petronas Dagangan Bhd may be hit by large lagged inventory losses in the first quarter of 2020, which may impact its full-year dividends assuming that it sticks to its historical payout ratio.
Sapura Energy Bhd, which already saw core net losses in the past three years, may see its losses remaining large in the foreseeable future if its tender drilling rigs fail to record higher utilisation and rates, its engineering and construction tenders continue to face compressed margins and its oil and gas fields sell their output at low prices (not a good time for its SK408 production to be commissioned).
Besides that, it said lower oil prices may keep petrochemical selling prices squeezed, keeping Petronas Chemicals Group Bhd’s earnings weak.