• Maintain OVERWEIGHT; Top Picks: Petronas Chemicals, Bumi Armada, Yinson, PTT Exploration and Production and Bangchak. Near-term oil prices should be supported by the continuously tight supply in the market. However, we maintain a conservative outlook, with a relatively lower YoY projection in 2023-2024, due to the higher possibility of economic slowdowns in that period.

• We increase our 2022F Brent crude oil price to USD108/bbl from USD104/bbl, while keeping 2023-2024 projections at USD85/bbl and USD75/bbl. We expect oil prices to average at USD110/bbl in 3Q22 and moderate to USD105/bbl in 4Q22. The higher adjustment reflects the continuously tight supply market in the near term, evidenced by low inventory levels and OPEC+ not meeting the production quota. At the recent 30th OPEC and non-OPEC Ministerial Meeting, OPEC+ reconfirmed its pledge to raise production by 0.648mbpd in August, as what had been agreed upon in the previous meeting. Overall, OPEC’s decision is likely to stay intact but supply should remain tight in 2H22 – as OPEC+ struggles to meet its production quota, casting doubt over the readiness of its spare capacity. Nigeria’s output ramp-up plan could be offset by a gradual decline in Russia’s production. With that, the Organisation for Economic Co- operation and Development (OECD) stock levels is likely to hover at current levels in the near terms, which is not far off from 2010-2014 averages.

• Be aware of a global slowdown. According to OPEC, global oil demand growth is still estimated at 3.4mbpd YoY to a total demand of 100.3mbpd for 2022F, premised on a global GDP growth of 3.5%. While we believe global oil demand is likely to strengthen QoQ as China relaxes its restrictions, crude oil prices could be dragged by increasing concern over global recession risks. For the time being, we think that the balance of risks is skewed towards a plain vanilla US recession, accompanied by a slow- down in global growth in 2023, but with limited risks of an economic or financial crisis environment arising in 2022-2023.

• US production to accelerate in 2023. Despite the strong rig count numbers, US production has only grown by 0.2mbpd to 11.9mbpd in the past six months. The slow ramp-up is widely explained by overall capital spending discipline amidst workforce and equipment bottlenecks, and the continuous decline in drilled but uncompleted (DUC) wells. This trend may change as the Energy Information Administration (EIA) expects US crude production to accelerate to 12.4mbpd in 4Q22 and grow by another 0.9mbpd to all-time high of 13.33mbpd in 4Q23.

• Maintain OVERWEIGHT. We believe that upstream service providers (drillers, maintenance-related) should benefit from a ramp-up in activities and increased domestic capex allocations, coupled with better service rates ahead. Exploration and production, selective refineries and petrochemical companies should continue to enjoy strong earnings, while riding on stronger product prices. Downside risks to our sector call: Weaker-than- expected crude oil and product prices, lower capex spending, and a slowdown in global economic growth.

Source: RHB Research - 4 Jul 2022