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Keep OVERWEIGHT; Top Picks: Dialog and Dayang Enterprise (Malaysia), PTT Exploration & Production (PTTEP) (Thailand), and AKR Corporindo (Indonesia). We lift our 2024F-2025F Brent oil prices to USD88 and USD83/bbl as the uncertainties arising from recent geopolitical conflicts could support prices in the near term.
Deepening conflict in the Middle East? It was reported that Israel has struck back last Friday, hitting a military site in a drone operation that was limited in scale and seemed to have caused little damage following Iran’s drone and missile attack on Israel on 14 Apr. However, according to CNN, the scope of Israel’s military response to Iran’s first-ever direct attack on the country remains unclear and Israeli officials have yet to publicly acknowledge responsibility for the reported overnight explosions in parts of Iran.
Our stance: The recent escalation in Middle East tensions spells two probable scenarios in the coming months. We think the base case scenario is for tensions to stay isolated within selected countries in the Middle East, suggesting that the collateral damage may be limited to the broader region and the Group of Seven (G7) members. In this scenario, we discount the possibility of a further escalation between Israel and Iran, with both sides taking a defensive (rather than offensive) stance in the current conflict. We view the second scenario – further escalation of current tensions – to be a tail-end risk at this point, defined as tensions spreading into the broader Middle East region, which may be further exacerbated should the G7 region use military intervention. We see upside risks for Brent crude at a high of USD140 per bbl should tensions escalate (note Brent edged towards USD140 per bbl in 2022 during the onset of the Russo-Ukrainian (RU-UK) conflict). Prices could stay elevated for longer, depending on the magnitude of the event.
Impact to the oil market. The disruption to the oil market at this stage is rather manageable assuming there is no further escalation between these two countries. Iran’s crude oil production was at 3.2mbpd in 1Q24 and any supply disruption should be well covered by OPEC’s spare capacity (6.6mbpd), of which Saudi Arabia and UAE account for the largest portion at 3.0mbpd and 1.5mbpd. Meanwhile, the recent re-imposition of US sanctions on Venezuela oil is likely to have rather minimal effect on the oil market given the latter’s oil production was only at 0.8mbpd in 1Q24 and we may see the trading pattern shift towards China at discounted prices.
Beneficiaries. Companies with exploration and production exposure (ie PTTEP, Dialog and Hibiscus Petroleum) should benefit from stronger commodity prices while we continue to like upstream service providers, benefiting from robust activities, solid charter rates amidst increased domestic capex allocations.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....