Overnight Brent crude prices hit its highest levels since July 2015, closing at USD58.44/bbl on concerns over potential supply issues as Turkey threatened to turn off a pipeline through northern Iraq and also the buildup on previous worries of US refineries having been hit by the hurricane season .This has put Brent crude prices within sight of the USD60/bbl mark and thus reinforcing our Overweight view on the sector premised on the stabilisation of prices at higher levels, thereby encouraging a return in activity. Our average Brent oil price levels are estimated as follows: 2017 – USD50/bbl and 2018 – USD55/bbl.

• Turkish threat. Turkish President Tayyip Erdo?an threatened to cut off a pipeline in northern Iraq that carries oil to the outside world. The disharmony stemmed from the Kurdistan Regional Government holding a referendum on Independence Day this recent Monday, which Erdo?an feared would encourage his own Kurdish population to push for independence. Consequently, he threatened to take economic, trade and security counter measures, including possibly shutting the pipeline that usually pumps between 500,000bbls/day and 600,000bbls/day from Iraq’s oilfields to the Turkish port of Ceyhan, where any disruption could have a significant effect on the market.

• Uneventful OPEC meeting. Oil prices continued to firm up this week, holding onto gains, despite no decision on the extension of curbing oil production beyond the current deal which expires March 2018. From the meeting in Vienna last Friday, the decision is that OPEC and other oil producers may extend cuts in the next formal OPEC meeting in November, but would most likely wait until January. OPEC together with Russia and several other producers have cut c.1.8mbbls/day since the start of 2017, which has seen to lift oil prices some 15% during the past 3 months.

• The EIA report projects total world energy consumption will rise by 28% between 2015 and 2040, with most growth coming from developing countries. The agency also reported another significant drawdown on gasoline stocks, partly due to the lingering refinery outages in Texas from the hurricane season, but also because demand is proving to be robust. There is c.1.0mbbls/day of refining capacity still offline in Texas, with a handful of large facilities operating below capacity. Supply of US gasoline is currently well within the 5-year range, and globally, OECD refined product supplies are similarly closing in. This means crude drawdowns can also be expected as refineries around the world need to pick up the pace.

• Overweight. Oil prices are expected to stabilise, with our estimates premised on the average YTD oil price at USD52.40/bbl for Brent and its futures for 2H17 at USD49.0/bbl to balance the year at our estimated USD50/bbl price for Brent in 2017. We opine the industry is more focused on robust activity at stable oil prices, rather than very high oil prices at this juncture which may not be sustainable.

Source: PublicInvest Research - 27 Sept 2017