• Still O/W; Top Picks: Yinson, Dayang Enterprise, PTT Exploration & Production (PTTEP), Star Petroleum Refining (SPRC). We expect oil prices to average at USD92/bbl in 4Q23 and USD85/bbl in 2024 on the assumption that Saudi Arabia and Russia will extend their production cuts until Mar 2024. Global oil demand is expected to grow by 1.9mbpd in 2024, thereby driving the market to an average theoretical deficit of 1.4mbpd.

• Saudi Arabia and Russia are largely in control. The recent rally is very much led by Saudi Arabia’s and Russia’s extension of their voluntary oil output cuts until the end of this year, and further anchored by lower global observed oil inventories to 13 months in August. The question now is whether the two countries will extend the production cuts into next year. If Saudi Arabia continues its current production cut, we expect the deficit to continue. In terms of demand, we are seeing another year of positive growth projection in the range of 1-2.4mbpd, depending on assumptions on the strength of the global economy, China’s recovery, and the magnitude of structural declines in road and transport fuel use in major markets.

• We raise our 2023 and 2024 Brent crude oil price assumptions to USD84/bbl and USD85/bbl from USD81/bbl and USD80/bbl, and maintain the 2025 projection at USD80/bbl. We raise our 4Q23 projection to USD92/bbl as the oil market should remain in deficit. Most international agencies such as the International Energy Agency (IEA), US Energy Information Administration (EIA), and OPEC are projecting positive QoQ global oil demand growth of an average of 1mbpd in 4Q23. We lift our 2024 projections by USD5/bbl to impute tighter supply from OPEC, premised on continuous voluntary cuts until Mar 2024 and healthy oil demand growth (+1.9mbpd YoY). The theoretical deficit is estimated at 3.1mbpd in 4Q23 and should average at 1.4mbpd in 2024F. Despite the supply tightness, we are mindful that US oil production has picked up to near-record levels at 12.9mbpd, and the EIA expects US crude oil production to stay at this level before averaging at 13.2mbpd (+0.4mbpd; +3% YoY) in 2024.

• Sector view. As oil prices are projected to average above USD80/bbl over the next three years, we believe this will continue to encourage oil companies to maintain their capex and opex spending plans. We are still positive on upstream services players, given the elevated level of activities. Drilling activities are guided to remain robust, similar to maintenance activities. We remain bullish on FPSO players for the robust demand and resilient earnings. In Thailand, PTTEP and SPRC are our preferred picks, as they should benefit from higher oil prices and stronger GRM.

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

Source: RHB Securities Research - 29 Sept 2023