SINGAPORE (May 21): In the wake of much publicised negative turn in oil prices, Maybank Kim Eng (MBKE) analysts predict a recovery in oil prices and oil-related stocks. Oil-producing nations have begun cutting production to adapt to severe oversupply while the lifting of lockdown measures will help increase demand going forward.
After entering negative territory in late April, oil prices have begun to correct upwards, with the Brent Crude oil index rising 18% to US$35.75 ($50.60) per barrel while the West Texas Index increased 27% to US$33.49. Agreed production cuts from OPEC+ have begun to take effect while demand for oil has increased in preparation for a post-lockdown economic jumpstart as US biotech firm Moderna announced promising early results for their vaccine tests. A weaker US Dollar and better performance on Wall Street have also contributed to oil price recovery.
“EIA reported that its crude inventories unexpectedly fell 4.98 million barrels (1.2 million above expectations). It also reported that supplies at the Cushing hub in Oklahoma, fell by a record 5.587 million barrels. Wednesday’s weekly EIA data showed that US crude oil inventories as of May 15 were up 10.1% above the seasonal 5-year average,” says Avtar Sandu of Phillip Futures, noting that this stemmed more from supply factors rather than a rise in oil demand.
Sandu sees this trend to continue in the medium-term as OPEC+ cuts place a floor under crude prices in 2H20. MBKE analysts Kaushal Ladha and Thong Jung Liaw further note that oil options also suggest that market risk is returning to historical normal as negative price risk fades. Premium to pay for out-of-money puts relative to calls has hit its lowest since 6 March.
With lockdown easing on the horizons, however, refiners are increasingly looking to increase run rates in anticipation of greater demand for refined oil. Yet, Ladha and Thong warn that a sharp recovery in run rates could risk extended weakness in Gross Refining Margin (GRM), hurting the profitability of refineries already reeling from weak demand and oversupply. Such trends are especially apparent in China, with economic recovery already well under way, though Asian refiners can take heart from large discount on Middle East crude.
The MBKE analysts also predict that chemical firms with gas feedstock are best-placed to see margin expansion going forward. Chemical prices currently trend 4% higher following crude (naptha feedstock) price recovery. “PE and PP spreads [however] were flat WoW, while PX is 12% lower on new Chinese capacity,” Ladha and Thong report.
In particular, Asian ethylene prices (feedstock to PE) saw a remarkable 52% surge over a fortnight compared to a 6% increase in PE prices arising from supply tightness as a result of weaker European and Middle East imports due to production disruption. Ladha and Thong anticipate that producers will look to maximise external sales of ethylene instead of using it to produce PE; PP and PE prices are expected to initially be highest in Vietnam as the first country to lift lockdown measures though demand remains weak.
MBKE Malaysian petrochemical analyst Lee Yen Ling anticipates the Malaysian oil and gas sector to be a good regional play for investors. Despite weak 1Q20 performance, oil companies have been proactively responding to the crisis, reducing capital and operational expenditure and slashing output to preserve cash flow, with government-owned oil firm Petronas following OPEC+ in committing to a 23% cut in output from May.
“While oilfield services (OFS) are always at the mercy of the oil companies whenever a crisis sets in, we see some standouts like Dialog and Yinson (key buys), proven to be resilient in a downcycle,” says Lee, noting that the latter is particularly prepared for a crisis and is the only Malaysian oil company with the potential to win jobs amid the present economic uncertainty. While Petronas’s weak 4Q19 performance will likely continue in the near-term, sell 50% of its interest in Block 52 off Suriname to ExxonMobil will probably strengthen its balance sheet.
Thailand’s oil sector is also another promising prospect for energy investors, with the Thai energy sector rising 4% w-o-w, outperforming the stock exchange by 3.2%. Aside from lockdown easing, this rally came off the back of downstream players benefiting from rising crude prices and attractive stock market valuations. The government has ordered legal crude reserves held by refiners be reduced from 6% to 4%.
“We believe the turning point for the refinery sector is approaching soon. A combination of factors will drive this push: Economies bottom in 2Q20; refined product supply has peaked; Covid19 restrictions will start to ease, reviving fuel demand; low crude prices can further spur demand,” reports MBKE. SPRC is set to benefit most due to its heavy gasoline bias (24%).
Vietnamese oil and gas stocks have also won some investor interests as its 3.2% w-o-w outperformed the VN-Index by 1.3%. Analyst Chuyen Le Nguyen Nha expects profit recovery to be realised for petrol distributors in May due to the low-cost inventory effect, as well as strong longer-term performance from PetroVietnam Technical Services (PVS) and PetroVietnam Drilling (PVD) should oil market rebalancing sustain. Unfortunately, Petrovietnam Gas will only enjoy limited gains if Brent prices do not stay above US$50/barrel.
As of 3.50pm today, the WTI crude index stands at US$34.11 per barrel while the Brent Index stands at US$36.24 per barrel.
