We maintain our Brent crude oil price forecast at USD70-75 per barrel for 2022 (YTD2021: USD75). We expect the impact of the Omicron variant to impact the demand for jet fuel in the near term due to travel restrictions, even though the world has come a long way and is better equipped to manage Covid-19 and its related challenges. We believe that OPEC+ is committed to provide a good equilibrium for oil prices in 1H22 as it aims to gradually increase oil production by 400k bpd monthly and to fully phase-out cuts by Sept 2022. Meanwhile in the local space, we expect Petronas capex spending to be maintained at the RM40- 45bn level annually over the next 5 years (2022-2027), with progressive increase in allocation towards renewable energy initiatives. Maintain OVERWEIGHT on the Oil & Gas sector with Bumi Armada (BUY; TP: RM0.84) and Dialog (BUY; TP: RM3.38) as our top picks.

Oil demand growth intact, impact of Omicron targeted towards jet-fuel demand. In the latest OPEC+ Monthly Oil Market Report published in Dec 2021, world oil demand is expected to grow by 4.3% at 4.2m bpd to 100.8m bpd in 2022F (from 96.6m bpd in 2021; 99.5m bpd during pre-pandemic). In-line with the expectations of a global economic recovery – IMF projects +4.9% global GDP growth in 2022 – global gasoline demand is projected to continue to recover and surpass pre-pandemic levels in 2022, while light distillates and diesel are expected to gain support from recent capacity additions and healthy end-user demand, increases in infrastructure spending and improvements in overall industrial activity. However, we expect the impact of the Omicron variant to only impact the demand for jet fuel in the near term due to travel restrictions as the world has come a long way and is now better equipped to manage Covid-19 and its related challenges.

Supply to also increase. In 2022, non-OPEC supply is projected to see robust growth of 3.0m bpd. This would be backed by the expected gradual increase in drilling and completion activities in the US, increasing output by 0.6m bpd. The US and Russia are forecasted to contribute two thirds of total expected growth, followed by Canada, Brazil, Kazakhstan, Norway and Guyuna. Investment in the non-OPEC upstream sector in 2022 is estimated at around USD350bn, showing a 50% drop compared to the 2014 level. We understand OPEC+ intends to maintain its stance, i.e. gradually increase oil production by 400k bpd per month at least until Apr 2022 and to fully phase-out cuts by Sept 2022.

Slight oversupply glut in 1H22. OPEC+ sees that there will be an expanding oversupply in global oil markets in early-2022, with a surplus of 2m bpd in Jan 2022, 3.4m bpd in Feb 2022 and 3.8m in Mar 2022. This is mainly due to the emergence of the Omicron variant, which seems to be harmful to jet -fuel related demand as it dampens hopes for speedy recovery for international travel.

Deployment of renewables to rise to record high. International Energy Agency (IEA) expects renewable energy to account for 90% of new power capacity expansion globally. Solar PV development will continue to break record highs, with annual additions reaching 162GW by 2022 (50% higher than the pre-pandemic level of 2019). Renewable electricity generation is forecasted to increase by almost 52% in the next 5 years, reaching over 11.3 kTWh by 2026, about 70% faster than the growth seen during 2015-2020. As a result, renewables are expected to account for almost 37% of global electricity generation by 2026. Offshore wind sees the fastest growth in the next 5 years (240%) among all renewables, reaching 1.5% of total generation by 2026 (Figure 1).

Beginning of the petrochemical down-cycle in 1H22. Based on our recent analysis on Petronas Chemicals (BUY; TP: RM10.90) and Lotte Chemical Titan (not rated), we gather that the petrochemical super-cycle has somewhat peaked due to the following reasons: (i) additional new supply globally (Figure 2) – which shows the following increase in total global capacity (Ethylene: 9.9%; HDPE: 13.2%; LDPE: 2.3%; LLDPE: 10.0%; PP: 8.4%); (ii) short-term supply shortage has been normalising; and (iii) limited demand growth to absorb new supply amid uneven recoveries globally. With that, we are expecting a down-cycle of the petrochemical sector over the next few years, beginning 2022. However, we should still see strength in earnings over the next 1-2 quarters for PChem due to skyrocketing urea prices, which should bolster earnings for the group’s F&M segment.

On home ground: Petronas capex and sector outlook. We expect Petronas capex spending to be maintained at the RM40-45bn level annually over the next 5 years (2022-2027), with about 9% (RM3.6-4.1bn) of its annual capex allocated to new energy initiatives. Petronas has pledged to a net-zero carbon emission goal by 2050, but still believes that oil and gas would still form 50% of the world’s energy mix for the next 20 to 30 years. Petronas also aims to increase domestic spending to 55% of capex (RM22-25bn) and the remaining would be for international programmes. We think that indicated capex levels should still be sufficient to help the sector recover in 2022, albeit still lower than its pre-pandemic 2018-2019 levels.

Oil price forecast. We maintain our Brent crude oil forecast at USD70-75 per barrel for 2022 (YTD2021: USD75) as we believe that OPEC+ is committed to provide a good equilibrium for oil prices. We view that the oversupply in 1H22 will be mitigated (not fully) by the increasing demand of O&G products from the reopening of economies globally, coupled with OPEC+’s program to gradually increase oil production by 400k bpd monthly and to fully phase-out cuts by Sept 2022, would bolster a stable oil price in the range of USD70-75 per barrel.

Maintain OVERWEIGHT. Our top picks for the sector are Bumi Armada (BUY; TP: RM0.84) given its foothold in the FPSO business which provides steady recurring income, coupled with speedy enhancement in its debt profile; and Dialog (BUY; TP: RM3.38) for its recurring income type of business model and we deem it as one of the only listed secular growth stock in the local oil and gas space.

Source: Hong Leong Investment Bank Research - 23 Dec 2021