• OPEC+ will increase its production by 1.2m bpd over May-Jul 2021, effectively reducing its production cut to 5.8m bpd from 7m bpd in Apr 2021.

• We see the risk to oil price is on the upside as there is increasing likelihood that the supply response could trail behind oil demand recovery. Nonetheless, the likelihood of ‘supercycle’ is minimal as US shale players could boost its production in high oil price environment, in our view.

• We peg our 2021 Brent forecast to USD65/bbl, which is slightly higher than our long-term oil price assumption of USD60/bbl.

• We remain OVERWEIGHT on Oil and Gas sector premised on the uptick in activities following higher oil prices.

OPEC+ to gradually boost supply

OPEC and its non-OPEC allies (OPEC+) agreed to boost supply gradually by up to 1.2m bpd over 3 months period ending July 2021. Effectively, total production cut will be eased to 5.8m bpd in July 2021 from 7m bpd in April 2021. We think this is timely as we expect further recovery in oil demand driven by further reopening in economies due to Covid-19 vaccine roll-out. With higher oil price, we expect higher US oil production moving forward following the rise in number of working drilling rigs. Nonetheless, we do not see this to pose any downside risk to oil price as we think OPEC+ will continue to accommodate any weakness in oil market.

Will there be an oil ‘supercycle’?

On the other hand, we see the risk to oil price is firmly on the upside as there is increasing likelihood that the supply response could trail behind oil demand recovery, particularly in the case that oil demand returns to pre-Covid-19 level much earlier than initially expected. In the event that the deficit was due to OPEC+ undersupply, we think it could be unwound pretty quickly as it could turn the taps on as soon as possible. But, should the supply shortage be due to slow US shale supply response, we think oil price can break above USD70/bbl. Nonetheless, we do not think this will prolong into a ‘supercycle’ as we think US producers will be able to boost its production in a high oil price environment. According to US EIA, the US oil production typically follow changes in oil prices with about 4-6 months lags. With the expected slower US supply response, the lag in production could now be extended to 8-12 months. Nonetheless, in the long-run, we expect oil price to deviate to its mean. At this juncture, we peg our Brent average price forecast for 2021 at USD65/bbl while maintaining our long-term oil price assumption of USD60/bbl.

Remain Overweight on the sector

We maintain our Overweight recommendation on Oil and Gas sector premised on the uptick in activities following higher oil prices. Our top pick is Hibiscus (BUY, TP: RM1.20) as we see it as the main beneficiary of foreign PSC exiting the country, hence potentially transform it into one of prominent oilfield operators in Malaysia.

Source: BIMB Securities Research - 6 Apr 2021