Saudi Arabia and Russia have agreed to continue their marriage once more by working together to rebalance the oil market. OPEC+ will cut production by 10mmbpd for the first 2 months which will progressively be reduced to 8mmbpd and 6mmbpd with the new deal ending in April- 22. This is at the lower end of Trump’s earlier tweet of a 10–15m production cut target, which is equivalent to 10% of total world supply. We see this as a good development in the near term to limit supply, but demand remains a concern, reaffirming our Underweight call.

Saudi and Russia to Jointly Cut Production by 5.3mmbpd

After slightly over a month of drama which started with Russia playing hardball for not agreeing to a further production cut, a consensus has been reached to reduce production to restore the balance in the oil market. OPEC+ will cut output by 10mmbpd from May until June-20, before progressively reducing this by 8mmbpd in 2H20, and by 6mmbpd starting Jan-21 to Apr-22. Saudi Arabia and Russia will lead the pack, jointly cutting 3.3mmbpd and 2mmbpd respectively (53% of the deal).

No News of US Involvement Yet – Possibly in G20 Meeting Today

There was no mention of US involvement in this 10mmbpd quota, which we believe should be determined in the G20 meeting agenda today. Russia had previously expressed a no deal unless US was involved as well. Based on a recent article, US companies has been guided to lower production organically by 4mmbpd, in line with the recent capex cut by various oil majors.

EIA Forecasted Unprecedented Oversupply in the Market, Before Deal

Based on the latest projection by US EIA published on 7 April 2020, the oil market is expected to see an unprecedented supply glut with oversupply hitting 5.7mmbpd and 11.4mmbpd across 1Q-2Q20. This is as compared to its initial March forecast of 1.5-1.9mmbpd prior to the coronavirus outbreak. This huge supply glut was underpinned by weaker demand on the back of the global economic disruption, reduced travel globally and on the assumption that OPEC+ does not agree to a production cut. On the contrary, the supply deficit from 4Q20 until end-21 is projected to be wider now, by between 1.3-2.1mmbpd (as compared to 0.03-0.7mmbpd) to support long term oil price, partly due to expected 700kbpd lower in US crude production (the 700k has yet to factor in the likelihood of a US production cut).

Maintain Our Underweight Call

We anticipated this supply cut, which nevertheless came sooner than expected. However, our concern still lies on global oil demand. We make no changes to our earlier Brent oil price assumption averaging US$30- 35/bbl for 2020 and US$35/bbl for 2021. We maintain our Underweight call on the sector retaining our view that Petronas could reduce capex spending affecting activities within the sector. For sector exposure, we only favour Dialog, a beneficiary of low oil price environment from their tank terminal exposure.

Source: Affin Hwang Research - 10 Apr 2020