• The US shale boom is threatening the oil market with an oversupply once again. Crude oil prices has entered a bear market after it plunged by over 20% in less than 2 months.

• We see potential downside risk to our current Brent forecast amidst higher production from the Permian basin. As such, we lower our 2019 average Brent forecast to US$65-70/bbl (from US$70-75/bbl).

• Within our coverage, potential key beneficiary from lower crude prices is Lotte Chemical Titan (BUY TP: RM7.25) while Hibiscus Petroleum (BUY TP: RM1.60) would likely be affected the most as its revenue is highly correlated with oil.

Resurgence of oil bears

The expectation that market will suffer a supply shortage as US pursues its economic sanction on Iran has thus far fizzled out after a temporary waiver was granted to 8 Iranian oil buyers. This has caught Saudi and Russia off-guard as both nations raised oil output in Oct to 10.7 mbpd and 11.4 mbpd respectively amidst calls to replace the expected shortfall from Iran. Brent crude price has tumbled by over 20% to US$66.62/bbl (as at 15th Nov 2018) from its 4-year peak of US$86.7/bbl in early Oct 2018. Meanwhile, US’ output has exacerbated the situation with average production jumped to 11.6m bpd in recent weeks and crude oil inventory rising to multi-month high at 431m bbls (Chart 1 & 2). In response, Saudi volunteered to reduce its Dec 2018 oil exports by 500k bpd. We expect production cuts by OPEC to be formalised in its upcoming meeting in Vienna on 6-7 Dec 2018.

Our view of Brent for 2019

We lower our 2019 average Brent forecast to US$65-70/bbl (from US$70-75). We believe this is fair as we view the joint coordination between OPEC and its non-OPEC allies (or otherwise known as OPEC+) will ensure a stable crude oil market as seen in recent years. We reduce our forecast due to the following factors:

(i) US’ drilled but uncompleted (DUCs) wells is at record high of 8,389 in Sep 2018 (Chart 3).

(ii) A series of new pipeline projects are expected to start commissioning in 2019, allowing completion of DUCs wells and higher crude production (Table 2).

(iii) Several OPEC countries remain conservative with the oil assumptions used for fiscal budget signaling tolerance towards lower oil prices; Iraq – OPEC’s second largest producer – imputed US$56.5/bbl for its 2019 fiscal budget (Table 3).

Further downside risk to our forecast would be lower-than-expected demand on potential consumption slowdown from trade tensions between US and China.

Potential winners and losers should downtrend in Brent persists

With crude oil entering a bear market, we note only one beneficiary within our coverage; Lotte Chemical Titan (BUY TP: RM7.25) which benefits from cheaper feedstock cost. On the flipside, we expect Hibiscus (BUY TP: RM1.60) to face selling pressure due to weak market sentiment as its revenue is highly correlated to crude oil sales price. The impact of low crude oil to the stocks under our coverage are summarised in Table 1 as below.

Source: BIMB Securities Research - 16 Nov 2018