• We attribute recent weakness in oil price to the potential inventories buildup in oil market, inline with IEA expectation for a surplus of 860k bpd in 2025. In addition, the expected cut in US Federal Fund rate (FFR) may also indicate a slowdown in economy and weaker oil demand.

• We observed that oil price tend to be under selling pressure during FFR cut cycle as evident in 2001 and 2007. Hence, upside to oil price may be limited in near term and it may only start to rise back when FFR stabilized, in our view.

• Overall, we cut our 2024 average Brent forecast to USD80/bbl (from USD85/bbl; YTD: USD82/bbl) while introducing our 2025 average Brent forecast at USD75/bbl, taking into account strong supply from non-OPEC and weaker demand outlook.

• Maintain an OVERWEIGHT recommendation on Oil and Gas sector. Our top pick are MISC (TP: RM10.30), MMHE (TP: RM0.94), Velesto (TP: RM0.34), and Hibiscus (TP: RM3.40).

Weak China Demand and Strong Non-OPEC Supply Dragged Oil Price

Brent oil price recently declined to close USD70/bbl. We think this is driven by gloomy outlook on demand particularly from China. Of note, Chinese YTD oil import for 7M2024 slipped 2.5% YoY at 317.84mn (7M2023: 325.98mn MT) which is in stark contrast to 11% YoY growth in 2023 (refer to Chart 1). We understand that Chinese petrochemical producers are cutting its operating rate amidst weak product margin environment and this could have led to lower oil demand.

Besides that, IEA anticipated that there will be a surplus in oil inventories in 2025 by 860k bpd even if OPEC+ maintain its production cut in place. This is driven by stronger non-OPEC production that is expected to grow by 1.5mn bpd in both 2024 and 2025. This will outpace the projected demand growth of less than 1mn bpd in 2024 and 2025.

Oil Price and Interest Rate Cut Relationship

Taking cue from previous FFR rate cut cycle back in 2001 and 2007, we observed that oil price tend to be under selling pressure during the period (refer to Chart 2 and Chart 3). The correlation, however, was relatively stronger during 2001 at +0.75 as compared to 2008 (+0.1). This may be attributable to stronger economic growth in China during the latter period that led oil price to shoot up temporarily. Given that China economy is still struggling, we think oil price should follow the 2001 playbook rather than 2008. Hence, upside to oil price may be limited in near term. We think it may move higher when FFR has stabilized, as evidenced in both year.

Regardless, we are not overly concerned on potential downside to oil price either, as we see physical market condition remain stable with both inventories at OECD countries and the US remain below 5-year average. The OECD oil inventories was reported to stand at 2,824mn bbls in Jun24 which is 21mn bbls lower than May24 figure. This is expected to decline further in Jul24 number (to be included in IEA Sep 24 report) and Aug24 number, given the seasonally stronger demand during summer in the West that will end in August.

Similarly, US inventories also currently stand at below its 5-year average. As at end 8th Sep 2024, it stood at 418mn bbls which is actually very close to 5-year low level of 416mn bbls. We believe this will provide some psychological support to oil price. Overall, we cut our 2024 average Brent forecast to USD80/bbl (from USD85/bbl) while introducing our 2025 Brent at USD75/bbl, acknowledging the strong supply outlook from non-OPEC moving forward

OPEC+ Decision Remain as Key Factor for Oil Price

OPEC+ has previously been mulling to unwind its production cut but it has now pushed back its plan owing to weak market condition. To recap, it planned to reduce the extra voluntary supply by up to 2.2mn bpd from 4Q24 through 3Q25. However, the first addition to supply is now expected to be in Dec24 by only 180k bpd. Given the expectation of stronger non-OPEC supply and the assurance by OPEC+ to ensure a balanced supply-demand dynamic, we do not discount the possibility of OPEC+ delay in raising output or even a further cut in production. At the extreme level, Saudi has previously cut its production to as low as 7.5mn bpd during Covid-19. That is 1.5mn bpd lower than current production of 9mn bpd. Thus, we think it is still capable to manage oil price at this juncture, by offsetting higher production from non-OPEC.

Maintain OVERWEIGHT on Oil and Gas sector

We maintain our OVERWEIGHT stance on the Oil and Gas sector. Our top pick remains as the following: MISC (TP: RM10.30), Hibiscus (TP: RM3.40), MMHE (TP: RM0.94), and Velesto Energy (TP: RM0.34). Despite lower oil price, we think MISC will not be heavily affected as both Offshore and LNG segments are on fixed long-term charter contract. Note that both segments made up 60-70% of our profit estimate. While Hibiscus may be affected by lower oil price, we think its acquisition of TotalEnergies Brunei asset could offset the impact. The acquisition is expected to be completed by 4QCY24. On the other hand, both MMHE and Velesto Energy have secured an orderbook of RM6.3bn and RM1.3bn respectively which would offer earnings visibility in the near term despite the unfavourable movement in oil price.

Source: BIMB Securities Research - 11 Sept 2024