We believe that the elevated oil price environment to persist in 2H2022 as we expect both demand and supply to both increase over the next few months – where demand will be driven by the easing of restrictions in China, summer driving and recovery of jet fuel while OPEC+ and US have also decided to increase production / release its reserves to fend off an acute supply deficit. With that, we maintain our Brent crude oil price per barrel forecast of USD100-110 for 2022 (EIA: USD108). Meanwhile, Petronas has announced that it will be increasing its capex in 2022 to RM60bn – would augur well for the local oil and gas sector as most of the listed service providers in the OGSE space are heavily reliant on Petronas as a major client. Maintain OVERWEIGHT on the Oil & Gas sector with DNeX (BUY; TP: RM1.69), Bumi Armada (BUY; TP: RM0.84) and Dialog (BUY; TP: RM3.32) as our top picks.

Oil demand projected to increase YoY. In the latest IEA Oil Market Report 2022, world oil demand is forecasted to average at 99.4mbpd for the year (+2% YoY). As restrictions in China ease, summer driving picks up, and jet fuel continues to recover, world oil demand is set to rise by 3.6mbpd from Apr to Aug. However, in line with IEA, we also view that soaring pump prices and slowing economic growth marred by monetary tightening are expected to soften demand recovery through the remainder of the year in 2H22 and into 2023.

Supply to also increase, inventory almost a decade low. Earlier in Jun 2022, OPEC+ has agreed to increase its monthly overall production in Jul and Aug to 648kbpd (from 432kbpd monthly). Note that this is alongside the US’s decision to release 1mbpd from the Strategic Petroleum Reserve starting in May 2022 for six months. Against the slowdown in demand growth, the increase in global output is expected to be sufficient to fend off an acute supply deficit amidst the worsening Russian supply disruption (by 1mpd). Excluding Russia, output from the rest of the world is projected to rise by 3.1mpd from May to Dec 2022. Also, we highlight that the global OECD oil inventory is almost at a decade low (almost reaching 2014 levels) – see Figure #2.

High oil price environment to persist. We make no changes and maintain our Brent crude oil price per barrel forecast of USD100-110 for 2022 (EIA: USD108). YTD, oil price averaged at USD105/bbl. Recently, European Union leaders have agreed on an embargo on Russia – halting 90% of the latter’s crude imports into the 27-nation bloc which will take full effect by end-2022. We strongly believe that the high crude oil price environment is here to stay for the medium term.

Beginning of the petrochemical down-cycle in 2H22. Based on our recent analysis on PCHEM (BUY; TP: RM11.76) and Lotte Chemical Titan (not rated), we view that the petrochemical super-cycle will peak in 2Q22 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 amidst high commodity prices worldwide and stagflation risks. With that, we are expecting a down-cycle of the petrochemical sector over the next few years, beginning 2H22. However, we should still see strength in earnings over the next quarter (2Q22) for PCHEM as based on our findings, average polymer prices were still slightly higher QoQ, ranging from +3% to +4%. On the flipside, average urea and methanol prices were slightly lower throughout 2Q22 at -7% and -3% respectively.

On home ground: Petronas increases capex guidance. Recently, Petronas has announced that it will be increasing its capex in 2022 to RM60bn, the highest it has been since 2015. We note that the indicated capex level of RM60bn would be a substantial increase from an earlier guidance of RM40-45bn – almost double 2021’s capex level of RM30.5bn. This would augur well for the local oil and gas sector as most of the listed service providers in the OGSE space are heavily reliant on Petronas as a major client and would serve to be direct beneficiaries of this development. However, we understand that there is no increase in dividend commitments for 2022 of RM25bn despite expectations of improved profits amidst an elevated oil price environment.

Maintain OVERWEIGHT. Our top picks for the sector are: (i) DNeX (BUY; TP: RM1.69) as it stands to be a direct beneficiary of the elevated oil prices from their Anasuria oilproducing assets and strong wafer ASP growth from Silterra; (ii) 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 (iii) Dialog (BUY; TP: RM3.32) 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 - 6 Jul 2022