A total of 1.2mmbpd will be removed from the oil market for 6 months from January 2019 onwards, representing 1.2% of the total supply. OPEC members pledged to cut 800kbpd of output, while the rest of countries including Russia with a lion’s share, will cut 400kbpd. We view this news positively, as it improves supply and demand dynamics, while injecting renewed optimism into the market. We expect Brent oil price to trade in the range of $70-75/bbl moving into 2019. Maintain OVERWEIGHT on the sector.

Venezuela Off the Hook Too

In addition to Iran and Libya being exempted from the production cuts, Venezuela was also spared from the production cuts. US waiver on Iran oil imports for eight countries due to expire in May poses uncertainties. Venezuela‘s economy continues to be crippled, while Libya’s risk of geopolitical tension involving the militants remain.

Recent Volatility Partly Driven by Trump

The days of OPEC being the determinant of oil price are over, as seen in recent deals, which required the cooperation of Russia and other allies. Further, Trump’s erratic tweets which publicly support low oil prices also played a role in increasing volatility in the oil market. Arguably, the recent production cut is seen as a counter measure to Trump’s action.

Recent Trade Truce a Long Term Demand Positive

The recent trade truce between US and China to bridge their differences on the trade talk supports our stronger oil prices thesis moving into next year as world demand is perceived to be stronger and is expected to peak only by 2020.

Maintain Overweight

Selective positioning remains important moving into 2019 amid weak sentiment surrounding the oil prices. The petrochemical space and maintenance players continue to be our favourite themes in the sector. For sector exposure, Petronas Chemical (BUY; TP: RM10.30) remains our top pick among the Big-caps. In the mid cap space, we like Serba Dinamik (BUY; TP: RM4.70). Kelington (BUY; TP: RM1.60) is our small cap top pick.

Source: Affin Hwang Research - 13 Dec 2018