Investment Highlights

• Brent crude oil prices hit new highs on the back of dual geopolitical threats, especially in Russia. Earlier this week, prices has begun testing the US$90/barrel (bbl) level following heightened concerns over energy security as the series of Ukrainian drone attacks on Russian refineries impacted 14% of the country’s primary oil refining capacity, according to estimates by Reuters. Additionally, the Middle Eastern conflict may escalate to a regional level after an airstrike, allegedly by Israel, on Iran’s consulate in Damascus, Syria led to the country’s vow to retaliate.
  
  Note that Iran accounts for up to 7.6% of total oil production from Organisation of the Petroleum Exporting Countries Plus (OPEC+) in January 2024. Despite sanctions from the US in recent years, Iran has been an important exporter of oil for China, making up 10% of its crude imports in 2023. Though we continue to monitor these developments for now, we believe these issues are unlikely to be resolved in the near future.
   
• Stronger than expected performance in China provides boost to near term expectations. On the demand side, global oil consumption has been stronger than expected by the market in our view, particularly in China. We gather that the country’s crude oil imports had risen by 5.1% YoY during January and February with oil cargo arrivals totalling 10.7mil barrels per day (bpd), data by China’s General Administration of Customs shows. This is in line with our expectations that the resumption of international air travel and increased activities by Chinese refiners will provide upside to the country’s oil demand in the near term as highlighted in our update titled “Higher for Longer” on 24 January 2024.
   
• OPEC+ production cuts likely to continue in 2QFY24. Wednesday’s OPEC+ Joint Ministerial Monitoring Committee meeting saw no changes to the group’s output policy, especially as members had already pledged to roll over current production cuts of 1.7 mbpd to 2QFY24. Member states exhibit a strong level of conformity during the prior quarter with excess production expected to be compensated for in the near term.
  
  Notably, the Russian government has opted to focus on production cuts rather than through exports totalling 471k bpd due to reduced refining capacity. We believe this will lead to an even tighter oil market environment as US production has been weaker than expected, largely attributable to the lower-than-expected production activity in January as a result of to the cold weather situation in North Dakota. The situation was the most evident in mid-March when the American Petroleum Institute (API) reported inventory withdrawals of 5.5MMbbl vs. market expectation of 0.3MMbbl. This led to the current inventory level situation, which is now 2% below the 5-year average.

• Maintain full-year 2024 oil price projection of US$85/bbl; potential peak in 2QFY24. We maintain our Brent crude oil price projection for now as global supply and demand levels have remained broadly within our expectations. For reference, this is slightly lower than EIA’s 2024 forecast which was recently raised to US$88/bbl (from US$83/bbl in its January STEO) on the back of OPEC+ production cuts but is in line with leading consultant Rystad Energy’s forecast of US$85/bbl.
  
  We do not believe current fundamentals reflect a medium-term price level north of our forecast as a rollover of OPEC+ production cuts into 2H2024 is uncertain for now as it is likely to lead to the group’s smallest market share in recent years. We expect to see Brent crude oil prices peaking in the current quarter.

• Maintain OVERWEIGHT on the sector. We believe the current oil price environment provides a trading opportunity for oil & gas companies which are exposed to the exploration and production subsegment as they will be able to command stronger selling prices.
  
  We expect to see Brent crude oil price to trade range-bound between US$70-US$95/bbl. In this regard, our top pick is Hibiscus Petroleum (BUY, FV: RM3.44), which is fully exposed to the subsegment through its direct interest in 4 production assets in both Malaysia and the North Sea, UK. The group expects total sales volume to be in line with its prior guidance at 7.7MMboe in FY24.
  
  We also expect to see Dialog (BUY, FV: RM2.91) as a potential beneficiary due to its exposure through assets L53/48 field in Thailand and the D35, D21 and J4 production sharing contracts (PSC) in Malaysia.

Source: AmInvest Research - 5 Apr 2024