Turning on the Production Tap

In last week’s Vienna meeting, OPEC and non OPEC allies decided to raise production output, effective July 2018. The group did not announce a targeted number, but to lower compliance rate to 100%, down from the latest 152% in May 2018. This would translate to 900kbpd incremental production, which is significantly lower than initial expectation of 1.5mmbpd. Iran, Iraq and Venezuela were reported to have opposed the deal. We are turning bullish on oil prices as macro developments over the past 6 months have been positive. Maintain Overweight on the sector.

Raising Production in New Deal

The actual production cut has exceeded expectations over the past 6 quarters, reaching 152% compliance in May 2018, partly at the expense of Venezuela’s current debt crisis. Under this new deal, the group will lower compliance rate to 100% from July 2018 onwards. By our estimates, this translates to a total 900kbpd incremental production, with OPEC raising 600kbpd back to the initially agreed 1.2mmbpd. However, we believe the supply would likely to be lower due to current limitation from certain countries.

Recap of 2016 Deal

Back in September 2016, OPEC and non-OPEC countries led by Russia agreed to cut production by 1.8mmbpd for six months, in an effort to bring down inventory level to their 5 year average. The deal was subsequently extended by another 9 months to March 2018, and again into end 2018 on November 2017.

Better Oil Price Outlook

While we see the possibility of short-term pullbacks from the current US$75/bbl level and some volatility ahead, depending on the response of US shale producers, we are expecting Brent crude oil price momentum to be positive for the rest of 2018.

Maintain Overweight

We now projecting Brent oil price to trade in the range of $70–75/bbl for 2018 and for Brent price to be flat at US$75/bbl in 2019. For sector exposure, we reiterate Petronas Chemical as our top pick among the Big-caps. In the small-Mid cap space, we like Bumi Armada and Serba Dinamik.

Source: Affin Hwang Research - 25 Jun 2018