Brent crude oil futures crashed 5.6% overnight Wednesday to USD86/bbl from US91/bbl on renewed demand concerns on the back of spiking bond yields that weigh down on global growth prospects. We are taking the view that this is just a blip and maintain our Brent crude oil price projection of USD90/bbl in 4QCY23 (which will bring CY23 average to USD84/bbl), supported by the continued tightening in supply and further inventory drawdown. We maintain our NEUTRAL call for the sector with positive view on upstream services (FPSO in particular), while the downstream outlook appears to remain challenging in the near-tomedium term. In 2024, we expect crude prices to average lower at USD86/bbl as an anticipated increase in YoY demand is expected to be offset by production increase (driven by non-OPEC production ramp up). Hence, we still favour upstream services as capex spending by oil producers, in our view, would still be gradually ramped up as long as crude prices stay above USD80/bbl/.

Just a blip. Brent crude oil futures crashed 5.6% overnight Wednesday to USD86/bbl from US91/bbl on renewed demand concerns on the back of spiking bond yields that weigh down on global growth prospects (see chart below). We are taking the view that this is just a blip and maintain our Brent crude oil price projection of USD90/bbl in 4Q CY23 (which will bring CY23 average to USD84/bbl), supported by the continued tightening in supply on extended production cuts by OPEC+ and further inventory drawdown in 4QCY23. In 2024, we expect Brent crude prices to trend lower from 4QCY23 levels and average at USD86/bbl as more crude supply gradually come online globally.

Still high crude prices largely driven by production cut. As per EIA estimates, OPEC+ would continue its production cut through end of 2023 (incorporating Saudi Arabia’s voluntary 1m per day production cut). This implies that the production cut was extended for longer than previously guided as previous expectations implied that the cut would expire by end September 2023. Global oil inventories are expected to fall by 0.2m bbls per day in 4QCY23, which is in stark contrast to inventory build up observed in 1HCY23. For perspective, global crude market supply was at its tightest in 3QCY23 when global crude inventories recoded a drop of 0.6m bbls per day. Hence, we opine that the rally in Brent crude prices since start of 2HCY23 signifies sustained OPEC+ production cuts and crude inventory started to be drawn down as opposed to being build up in 1HCY23.

More supply to come in 2024. In our view, the tightness in the global crude market would be partially alleviated as EIA has forecasted YoY increase in production by 1.7m bbls per day in 2024. OPEC is expected to ramp up its production YoY by 0.4m bbls per day (compared to estimated 0.8m in 2023). The main driver of production growth would stem from US, Brazil, Canada and Guyana. In 2024, EIA has also factored in inventory builds restarting (flipping from current inventory draw) and to sustain throughout 2024. This indicates to us that, starting 1QCY24, upward pressure on crude prices would be lower compared to 4QCY23 barring any unforeseen upside surprises in global demand (which appears to be on weaker trends recently). Therefore, on average, we do not expect significant change in average Brent crude price in 2024 compared to 2023.

Crude consumption growth still expected to grow in 2024, but downside risk remains. EIA is still expecting 1.4m YoY increase in crude consumption in 2024 (bringing 2024 total crude demand to 102.3m bbls per day). According to breakdown of demand assumptions by EIA, majority of the increase in expected demand for crude would be derived from non-OECD countries, mainly China and other parts of Asia. On the other hand, US consumption of crude is expected to only record an increase of 0.2m bbls per day. Therefore, crude consumption growth assumption largely hinges on Asia demand growth, which at this juncture, is subject to slight downside risk due to ongoing economic concerns. Therefore, we are of the view that crude prices (while would sustain at current ranges) is unlikely to reach USD100/bbl or higher as the majority of the demand increase would be compensated by expected increases in production from non-OPEC countries.

Maintain NEUTRAL on oil & gas sector. All in all, we reiterate our neutral call on the sector while within the subsector, we prefer upstream services due to anticipated pick-up in upstream spending by Petronas group (our Brent assumption is at USD84/bbl for 2023 and USD86/bbl for 2024). On the downstream, we are less excited on its near-tomedium term outlook as supply of petrochemicals continue to outweigh demand (largely due to expansion in capacity in China and Asia overall) while fertiliser prices are highly unlikely to repeat its stellar 2022 price performance. Our top pick remains Yinson (OP; TP: RM3.65) due to its expected solid recurring earnings growth in the coming years driven by its secured FPSO projects and Dialog (OP; TP: RM3.10) due to bottoming demand for tank terminal storage space and significant long-term expansion of in Pengerang, Johor on its 500 acres of land to be developed.

Source: Kenanga Research - 6 Oct 2023