• Still OVERWEIGHT; Top Picks: Malaysia Marine & Heavy Engineering, Yinson, Bangchak (BCP), and PTT Oil and Retail Business (OR). We cut our average Brent crude oil price for 2023F to USD81/bbl as global oil demand is estimated to grow by 2mbpd this year, thereby driving the market to a theoretical deficit of 0.5-0.6mbpd in 2H23. We believe OPEC+ is ready for more severe production cuts if demand weakens, while US production is likely to remain stagnant in the near term.

• We cut our 2023 Brent crude oil price assumption to USD81/bbl from USD85/bbl, and maintain 2024-2025 projections at USD80/bbl. We also lower our 3Q23 and 4Q23 projections to USD80/bbl and USD85/bbl, largely premised on stronger fundamentals as a result of higher demand. Global oil demand is estimated to grow by 2mbpd this year, which will drive the market to a theoretical deficit of 0.5-0.6mbpd in 2H23. We still expect a balanced market, with an average theoretical deficit of 0.1mbpd in 2023. In the medium term, the International Energy Agency (IEA) is projecting global oil demand to grow from 99.8mbpd in 2022 to 105.7mbpd in 2028. It expects that, from 2024 onwards, global oil demand growth will fall below 1mbpd and further moderate to <0.5mbpd in 2027-2028. This is premised on the assumption that oil demand for gasoline, road transport and total transported are projected to peak in 2023, 2025 and 2026.

• Ready for more cuts? While it will take some time for the market to get past the negative sentiment arising from macroeconomic concerns and uncertainties, we believe OPEC+ is ready for more severe production cuts - evidenced by the recent announcement of the extension of voluntary cuts by Saudi Arabia and Russia through August. Note that current oil prices are trading below the International Monetary Fund’s (IMF) estimated fiscal breakeven level of USD80.90/bbl. This is rather a tall order, in our view, for US to achieve average US Energy Information Administration’s 12.6mbpd projection of 2023 – which implies an average production of 12.9mbpd in 2H23. We see a higher possibility for a stagnation in shale oil production in the near term, especially when the rig count is on a downtrend.

• Sector view. As oil prices are projected to average at USD81/bbl this year, we believe this will continue to encourage oil companies to maintain their capex and opex spending plans – this should be a boon for upstream services players. While we remain upbeat on the overall level of oil & gas activities, we turn more selective on stock picks. We prefer companies with resilient earnings profiles, backed by solid orderbooks. For Thailand, we like BCP and OR, which should see the positive effects of the recovery of the retail business market. Thailand is in an economic and tourism recovery, leading to high demand for transportation and retail activities in these companies’ branches and service stations throughout the country.

• Downside risks to our sector weighting: Weakening oil prices and demand, as well as a decrease in spending by clients

Source: RHB Securities Research - 5 Jul 2023