• Oil market faces significant oil demand loss from measures to contain the Covid-19 pandemic. We view that no production cut is sufficient to balance the market in the near term.

• We lower our 2020 average Brent forecast to USD30/bbl (from USD65/bbl) in view of global recession compounded by higher supply amidst oil war.

• Within our coverage, potential key beneficiary from lower crude prices is Lotte Chemical Titan (BUY TP: RM2.00) while Hibiscus Petroleum would likely be affected the most as its revenue is highly correlated with oil.

Unprecedented oil surplus environment

Oil market could be facing an unprecedented oil surplus in coming weeks with weakening demand due to Covid-19 pandemic. The oil demand is expected to decline as more countries announcing strict measures including travel restriction and lockdown to combat the contagious Covid-19 virus. At its peak, Vitol – an oil trading house – expects that oil demand could drop by c.20m bpd yoy, while IHS Markit sees 2Q20 oil demand to decline by 14m bpd yoy.

While oil demand is falling, the oil war causes another shock to the supply side. Russia’s rejection to OPEC’s proposal to make additional production cut of 1.5mbpd has led to the end of OPEC production curb agreement. It is now expected that there will be an additional oil supply of c.3-4m bpd swamping the market in April 2020, contributed by higher production from Saudi, UAE and Russia.

We expect geopolitical tension to continue dictating the market direction in future. We think Russia – who aims to gain market share from US shale – will never turn to Saudi again considering massive capex cut announced by US shale in the past few weeks. The US Texas Oil authority will meet OPEC next June to cooperate on production cut but we think that it still not sufficient to balance the market as the expected decline in oil demand has far surpassed what everyone could possibly cut.

Our view of Brent for 2020

As oil price is currently hovering below USD30/bbl, we think there is further downside risk to Brent crude oil price in view of looming global recession in coming quarters, compounded by increasing supply. In totality, we expect c.15m bpd of oil surplus in 2Q20 which translates into approx. 1.3bn barrels of oil surplus, which may fill up nearly all available onshore oil storage estimated at c.1.5-2bn barrels globally.

Overall, we lower our 2020 average Brent forecast to USD30/bbl (from USD65, YTD: USD51/bbl). We think the global recovery from Covid-19 pandemic will be the key factor for oil price to recover.

Potential winners and losers of low crude oil

With crude oil entering a bear market, we note only one potential beneficiary within our coverage; Lotte Chemical Titan (BUY TP: RM2.00) which benefits from cheaper feedstock cost. On the flipside, we think Hibiscus (TP and recommendation under review) is at risk of having negative cash flows in coming quarters as its cash cost is c.USD30/bbl. Our top pick remains Yinson (BUY, TP RM7.70) owing to its long term earnings visibility. The impact of low crude oil to the stocks under our coverage is summarised in Table 1 as below.

Source: BIMB Securities Research - 1 Apr 2020