• Despite oil price was weak in 1Q24 at the range of USD75-85/bbl, the physical oil market was indeed in a tight market condition. IEA reported that OECD oil inventories stood at 2,758mn bbls in Jan24 which is c.70mn bbls lower than Jan23 level.

• IEA has revised upwards its oil demand growth by 110k bpd to 103.2mn bpd owing to higher bunker fuel demand due to Red Sea crisis. On the other hand, it cut its oil supply estimate by 920k bpd to 102.9mn bpd with the expectation of roll-over in OPEC+ production cut until end of year.

• Consequentially, oil market could be in deficit of 300k bpd in 2024 which will cause further drawdown of inventories. If this is materialize, we think Brent could rise further to USD95-105/bbl in near term. Nonetheless, we keep our Brent forecast of USD85/bbl unchanged at this juncture.

• Against this backdrop, we advise investors to take position in companies that has direct exposure to oil prices such as Hibiscus (TP: RM3.40) and DNeX (TP: RM0.58).

• Maintain an OVERWEIGHT recommendation on Oil and Gas sector. Our top pick are MISC (TP: RM10.10), MMHE (TP: RM0.94), Velesto (TP: RM0.34) and Hibiscus (TP: RM3.40).

Oil Market is Getting Tighter

Brent oil price recently rose to USD90/bbl after it was trading in the range of USD75-85/bbl in 1Q24. We think this is driven by a tight physical market condition. The International Energy Agency (IEA) had reported that OECD oil inventories stood at 2,758mn bbls in Jan24 which is c.70mn bbls lower than Jan23 level as well as below historical average of 2,900mn bbls.

In its Monthly Oil Market Report published in March 2024, the IEA has raised its 2024 oil demand forecast by 110k bpd to 1.3mn bpd mainly to account for stronger bunker fuel demand following change in trade flows and longer shipping route amidst Red Sea crisis. Hence, demand is expected to average at 103.2mn bpd.

Meanwhile on the supply side, the agency trimmed its forecast by 920k bpd to 102.9mn bpd as it expects OPEC+ production cut to be extended until end of 2024 (from current June 2024 deadline). Effectively, this will result in a deficit market (demand exceeds supply) of c.300k bpd throughout of the year.

No Change to Brent Oil Average Price Forecast

Owing to the deficit in oil market, we expect further drawdown in oil inventories which will keep oil price to remain elevated for remaining of 2024. Taking cues from IEA’s forecast, we think Brent could potentially rise to USD95-105/bbl soon. However, at this juncture, we keep our Brent forecast for 2024 unchanged at USD85/bbl. Note that Brent was traded at an average price of USD82.3/bbl in YTD24 which is similar to same period last year (YTD23: USD82.3/bbl).

Maintain OVERWEIGHT on Oil and Gas sector

Against this backdrop, we advise investors to take position in companies that has direct exposure to oil prices such as Hibiscus (TP; RM3.40) and DNeX (TP: RM0.58). We also maintain our OVERWEIGHT stance on the Oil and Gas sector. Our top pick remains as the following: MISC (TP: RM10.10), Hibiscus (TP: RM3.40), MMHE (TP: RM0.94), and Velesto Energy (TP: RM0.34).

Source: BIMB Securities Research - 8 Apr 2024