The year 2023 has seen OPEC+ in active intervention mode as the cartel kept cutting its production to support oil prices and balance the market. As a result, Brent crude oil prices traded at the range of USD70-90/bbl throughout the year after a series of additional voluntary cuttings mainly from the cartel’s de-facto leaders, Saudi Arabia and Russia. Going into 2024, OPEC+ decided to continue the production cut until March 2024 given persistent pressure on oil prices. A price war is unlikely, however, as producers may find a resolution through diplomacy to support the price and sustain market share. On the demand side, the tug of war between interest rate and inflation is almost at an end with the expectation of soft landing without overall contraction in economic activity. 1H2024 oil demand is still expected to remain lacklustre with improvements only in 2H2024 once monetary easing kicks-in. Thus, we expect Brent oil prices to be traded at an average of USD80/bbl throughout 2024, slightly below the USD82/bbl in 2023. We maintain our Neutral call on the sector.

• Supply to cap upside. Despite expecting supply deficit in 2024, OPEC+ decided to have 2.2 million barrel per day (MMbbl/d) in additional voluntary cuts until March 2024. Having said that, we believe the cut is not impactful to the market due to the “voluntary” basis and insignificant volume reduction from the current production level. Although OPEC+ may make further cuts, a price war is unlikely, as diplomacy remains a favorable approach despite it losing the market share to the US with all time high crude production level at 13.2MMbbl/d.

• Brent to average at USD80/bbl in 2024. Against the backdrop of lackluster demand in 1H2024, we expect OPEC+ to continue its active role in managing Brent oil price between USD70/bbl to USD100/bbl, capped by supply. On the floor price, Strategic Petroleum Reserve (SPR) is expected to build up its inventory and OPEC+ is likely ready to cut more of its production to prevent imbalances in the market. Any geopolitical tension would amplify oil prices volatility depending on the exposure of demand supply oil market.

• PETRONAS capital expenditure (capex) remains intact. As long as Brent oil price remains supported above USD60/bbl, PETRONAS is unlikely to rollback its capex. PETRONAS Activity Outlook (PAO) 2024 shows that overall activity remains stable despite it recorded lower profit for the year due to lower oil price. Assets from local oil and gas services equipment (OGSE) providers are expected to be fully utilised. Riding on this, OGSEs will continue to service clients by using well-maintained aged assets to maximise the value and charge higher unit rates due to the scarcity of the asset in the market. On this note, we favour Dayang Enterprise (TP: RM2.25) and Uzma (TP: RM1.20) as brownfield specialist OGSEs who are expected to secure long-term key contracts in 2024 by capitalizing on capabilities and key assets in respective portfolios.

Source: PublicInvest Research - 21 Dec 2023