The drone attack on Saudi Arabian oil facilities resulted in a 5.7mmbpd disruption from its current production of 9.8mmbpd. Unsurprisingly, Brent oil prices rallied by 15% to US$69/bbl (after hitting a day high of US$71.6/bbl) on Monday and could help local sector sentiment. We are upbeat on global oil prices in the short run as the disruption may take longer-than-expected given Saudi’s less optimistic view of a full production resumption over the near-term. However, we maintain a Neutral sector rating as the disruption is still viewed to be temporary. The best proxy to any sustained oil price hike is Hibiscus (non-rated) and Petronas Chemical (PCHEM). We have Buy calls on Serba Dinamik, Bumi Armada, Velesto Energy and Kelington.

Saudi Attack Impacted 5.7% of Global Production

The drone attack over the weekend on Saudi’s Abqaiq oil processing facility and Khurais oil field has impacted production by 5.7mmbpd, lowering current production from 9.8mmbpd to 4.1mmbpd. This represents a significant 58% of its own production and 19% of OPEC’s total production as of Aug 2019, which made up 5% of world supply. While Saudi Arabia had initially guided for full production resumption by yesterday, reality started to sink in and Saudi turned less optimistic over a full recovery and currently only expects to restore one-third of the lost production. It is uncertain at this juncture how long the global outrage will prolong. Meanwhile, the strategic petroleum reserve of U.S and Saudi stockpile of 645mmbbls and ~190mmbbls would be used to mitigate the shortfall, thus limiting any sharp oil price movement.

Sentiment May Drive Short-term Recovery in Brent Prices

Based on EIA STEO report published in Sep 2019 (Fig 4), current oil market is undersupplied by 480kbpd over the next 4 quarters (from 4Q19 until 3Q20). Factoring in the 5.7mmbpd supply disruption, oil demand will far exceed supply, ceteris paribus, which is positive for global oil prices. We maintain our 2H19 Brent oil price assumption at US$65-70/bbl, but there could be upward bias to our current assumption in the short-term depending on the timeline of production resumption.

Maintain Neutral Sector Rating

The supply disruption of this scale should result in a more bullish sentiment for the Brent oil prices and sector in the near term, putting O&G stocks under the spotlight. Hibiscus (non-rated) is the direct proxy to benefit from an oil price recovery. In our coverage, PCHEM stands to benefit from a recovery in petrochemical prices and Petronas Dagangan with a possible inventory lagged gain. We have BUY calls on Serba Dinamik, Bumi Armada, Velesto Energy and Kelington, which are all service providers, and their earnings do not directly benefit from higher oil prices. However, we believe these stocks would likely see higher interest in view of the current bullish oil price sentiment.

Source: Affin Hwang Research - 17 Sept 2019