Global oil demand remains a concern despite Opec+ output cut deal

PETALING JAYA: Global oil demand remains a concern even after the production cuts agreement struck last week.

Organisation of the Petroleum Exporting Countries members and their allies, collectively known as Opec+, agreed to cut output by 10 million barrels per day (mmbpd) from May until June 2020, before progressively reducing this by 8 mmbpd in the second half of the year, and by 6 mmbpd starting January 2021 to April 2022.

Saudi Arabia and Russia will lead the pack, cutting 3.3 mmbpd and 2 mmbpd respectively.

In a note, Affin Hwan Capital Research said that while anticipated, the production cut had come sooner than thought, and concerns still remain on global demand.

“The supply deficit from 4Q20 until end-2021 is projected to be wider now, by between 1.3 and 2.1 mmbpd, as compared to 0.03 and 0.7 mmbpd, to support long-term oil prices.

“We make no changes to our earlier Brent oil price assumption averaging US$30-35/bbl for 2020 and US$35/bbl for 2021,” it said.

The research house is maintaining its ‘underweight’ call on the sector, retaining its view that Petronas could reduce capital expenditure, affecting activities within the sector.

For sector exposure, its only pick is Dialog Group Bhd.

AmInvestment Bank Research has lowered its Brent crude oil price forecast for 2020 to US$35–US$40/barrel from US$40–45/barrel, while maintaining 2021’s at US$45–US$50/barrel.

“We view these cuts as necessary given that global storage facilities are rapidly reaching full utilisation due to the massive Covid-19-depressed demand loss. Nevertheless, the Opec+ cuts of only 10mil barrels/day, compelled by lower offtake, are inadequate to prevent oil prices from sliding back below US$30/barrel,” it said.

It also stressed that lower oil prices are less of a concern compared with the drastic plunge in demand as national oil producers have begun to cut back on production.

AmInvestment Research noted that most local participants in the sector, except those in storage services, will be adversely impacted.

“Those with upstream production sharing contracts such as Sapura Energy Bhd and Hibiscus Petroleum Bhd will suffer from lower prices and offtake, followed by fabricators such as Malaysia Marine & Heavy Engineering Bhd and offshore support providers Bumi Armada Bhd and Velesto Energy Bhd,” it said.

It is also keeping its underweight call on the sector, and sell recommndations on Bumi Armada, Dialog Group, Sapura Energy, Serba Dinamik Holdings Bhd and Velesto Energy.

PublicInvest Research said it, too, has lowered its oil price projection for the year to between US$35 and US$39 per barrel, but noted that the lower oil prices will result in the Malaysian government collecting less petroleum-related revenue this year.

Using the initial 2020 crude oil price estimate of US$62 per barrel, the government was initially expecting to collect about RM40 billion from petroleum-related revenue this year, a tad lower than the RM42 billion estimated for 2019.

As a comparison, the government collected RM36 billon and RM38 billion in petroleum-related revenue in 2017 and 2018 when Brent was at US$54 and US$52 a barrel respectively.

As such, the research house is expecting Malaysia’s fiscal deficit to reach RM65 billion, or 4.7% of gross domestic product assuming 0% GDP growth in 2020.

“The widening of fiscal deficit in 2020 will be contributed by a combination of a drop in revenue and a jump in expenditure, notably the RM22 billion fiscal injection under Covid19 stimulus package,” it said.

At the same time, direct and indirect tax contributions may decrease due to the slowdown in economic activities, and petroleum revenue may drop to RM30 billion in 2020 driven by lower oil price.

“The pressure on fiscal position is not expected to affect our sovereign debt rating given the one-off nature of Covid-19 but there must be medium-term fiscal consolidation efforts to maintain that,” PIVB Research said.

source https://www.thesundaily.my/business/global-oil-demand-remains-a-concern-despite-opec-output-cut-deal-EF2250204