• We think Biden’s win in the US Presidential election may be positive to oil market due to his strong commitment to RE which could lessen US oil supply growth and lend more power to OPEC as swing producer.

• We expect Brent to trade at an average of USD40/bbl in 2021 on the assumption that OPEC+ will be able to balance the oil market hence limiting the downside.

• We remain NEUTRAL on Oil and Gas sector as we remain selective on our stock pick. In the upstream segment, we are OVERWEIGHT on FPSO leasing company which could serve as a proxy to frontier oil and gas development projects.

Biden win may be positive to oil market

We think Biden’s strong commitment towards Renewable Energy (RE) could eventually lead to a more stable oil market due to (i) OPEC could gain more power to act as the ‘central bank’ of oil market following reduction in US oil supply; (ii) lesser US oil supply due to higher cost of production from tighter regulation and (iii) higher fiscal stimulus will boost oil demand and help to expedite the recovery to prepandemic level. Nonetheless, there could also be some downside risk to oil price should Biden reinstate the Iran nuclear deal too soon which could pave way for the return of 2m bpd Iranian oil to the market.

Brent to average at USD40/bbl in 2021

We expect Brent to trade at an average of USD40/bbl in 2021 on the back of the assumption that OPEC+ will continue to play its role in order to balance the oil market. Recall that OPEC+ and its allies has agreed to cut 9.7m bpd of oil production in MayJuly 2020 before easing the cut by 2m bpd from Aug until Dec 2020 followed by another 2m bpd from Jan 2021 until Apr 2022. As we expect oil price to remain at current level, we see a mixed outlook in offshore development projects where recovery in global project FID are expected to be centred mostly around frontier geographical areas such as in Suriname, Guyana, and Brazil which are believed to hold vast amount of hydrocarbon resources. Whereas, shale projects and elsewhere are seen as muted.

Remain Neutral on the sector

We maintain our NEUTRAL recommendation on Oil and Gas sector as we remain selective on our stock pick. In the upstream segment, we are OVERWEIGHT on FPSO leasing company such as MISC (BUY, TP: RM8.40) and Yinson (BUY, TP: RM6.30) which could serve as a proxy to frontier oil and gas development projects. On the other hand, we are less sanguine on jack-up rig operator such as Velesto (HOLD, TP: RM0.12) and fabricators due to lack of contract from local offshore development projects. Notwithstanding, we have BUY call on MMHE (BUY, TP RM0.42) as we think its expansion in marine business through construction of new dry dock DD3 will reduce its risk exposure towards cyclical oil development projects. We are NEUTRAL on downstream as oil demand outlook is weak amidst worldwide travel restriction and uncertainties over global economic condition.

Source: BIMB Securities Research - 6 Nov 2020