Even before eruption of Israel-Hamas hostilities on Oct 7th, oil price dynamics were positive, with US Energy Information Administration’s (EIA) Sept Outlook update expecting a net crude oil deficit in 4Q23 and record-high oil consumption of 101.2mbpd and 102.9mbpd in 2023-2024E. Coupled with multiple rounds of productions cuts by OPEC+ since Nov 2022 and underinvestment due to long-term demand uncertainties amidst accelerating global decarbonisation efforts, Brent could head to USD100/bbl, especially if Middle East hostilities worsen. Budget 2024’s average oil price forecast of a higher USD85/bbl (2023E: USD80) dovetails with this bullish near-term outlook, with petroleum-related revenue share of total at a still-high 20% (2023E: 23%). O&G sector picks are Yinson, BArmada and Wasco.

However, channeling King Pyrrhus of Epirus who famously lamented “One more victory like this and we are undone”, oils’ current vigour could prove a Pyrrhic victory longer-term. Besides pushing the world to transition even faster re inter-related issues of enhancing energy security and reducing dependence on fossil fuels, supply options are being revisited e.g. the US is seeking to ease sanctions on Venezuela, home to the world’s largest oil reserves, while shale is making a comeback as US domestic oil production hit an all-time high this month. ExxonMobil’s mammoth USD60b acquisition of shale giant Pioneer Natural Resources underscores a growing preference for less risky, cheaper and faster turnaround onshore assets vs. the capitalintensive, multi-year investment cycles typical of offshore drilling.

“Going local” is a strategy national oil company Petronas, which is expected to pay a lower MYR32b dividend in 2024E (2023: MYR40b; in fact, eventual actual annual dividend has been consistently revised higher since 2018) and had >MYR100b net cash as at 1H23, should also ponder as it aims to de-risk and transition to lower emissions/carbon operations. The investment requirements of the recently-articulated National Energy Transition Roadmap (NETR) are enormous, with the 70% RE target (by 2050) alone to require capex of c.MYR637b. There appears room for Petronas, with its’ financial muscle and respected management, to play a broader role in funding NETR projects and attracting crucial foreign investor partnerships vs. current relatively narrow focus on CCUS. Fast-tracking the domestic listing of its’ fastgrowing clean energy solutions arm Gentari could be a key enabler and also a global advertisement for Malaysia’s transition ambitions.

Source: Maybank Research - 23 Oct 2023