KUALA LUMPUR: The initial agreement between Saudi Arabia and Russia, two of the world’s largest oil producers, to limit supply is good in the near term, Affin Hwang Capital said.
Still, the firm said demand remains a concern, thus reaffirming its “underweight” call on the local oil and gas sector.
Affin Hwang maintained its earlier Brent oil price assumption averaging between US$30 and US$35 per barrel for 2020 and US$35 per barrel for 2021 as it expected more supply cuts.
The firm said based on the latest projection by the US’ Energy Information Administration (EIA), the oil market might see an unprecedented glut with oversupply hitting 5.7 million barrels per day (bpd) and 11.4 million bpd across the first quarter (Q1) and Q2 of 2020.
This was higher than the EIA’s initial March forecast of 1.5 million bpd to 1.9 million bpd prior to the Covid-19 outbreak.
"This huge supply glut was underpinned by weaker demand on the back of the global economic disruption, reduced travel globally and on the assumption that the Organisation of the Petroleum Exporting Countries and other producers including Russia (OPEC+) does not agree to a production cut.
"On the contrary, the supply deficit from Q4 2020 until end-2021 is projected to be wider now, by between 1.3 million bpd to 2.1million bpd (as compared to 0.03 million bpd to 0.7 million bpd) to support long term oil price, partly due to expected 700,000 bpd lower in US crude production,” Affin Hwang said today.
The firm added that the 700,000 bpd had yet to factor in the likelihood of a US production cut.
It said there was no mention of the US involvement in the 10 million bpd quota, which it believed should be determined in the G20 meeting agenda later today.
"Russia had previously expressed a no deal unless the US was involved as well. Based on a recent article, US companies have been guided to lower production organically by four million bpd, in line with the recent capex (capital expenditure) cut by various oil majors,” it said.
Affin Hwang retained its view that Petroliam Nasional Bhd could reduce capex spending, affecting activities within the sector.
For sector exposure, it only favoured Dialog Group Bhd, a beneficiary of low oil price environment from its tank terminal exposure.