by MARK RAO/ pic by BLOOMBERG

THE prospects of OPEC and major oil producers strengthening their alliance in order to reduce oil price volatility amid growing US shale production and waning energy demand have attracted investor interest in sector stocks.

The companies that fetched the highest returns over the past one month were Petra Energy Bhd (up 35.1%), Uzma Bhd (up 26.6%), Carimin Petroleum Bhd (up 10%), Dayang Enterprise Holdings Bhd (up 4.2%) and Dialog Group Bhd (up 3.2%).

The bulk of these companies’ services are for the upstream sector, except for Dialog, whose services extend across both upstream and downstream.

For the day, Practice Note 17 companies Barakah Offshore Petroleum Bhd and TH Heavy Engineering Bhd were the largest gainers after both closed 16.7% higher yesterday at 3.5 sen and seven sen respectively.

Other notable gainers for the day were Bumi Armada Bhd, Hibiscus Petroleum Bhd and Sapura Energy Bhd.

Bumi Armada, whose shares closed three sen higher at 28.5 sen, announced last week that it had found a buyer for its non-utilised floating production storage and offloading (FPSO) vessel, namely Armada Perdana FPSO, for US$40 million (RM166.7 million).

Meanwhile, Sapura Energy said its 50%-owned SapuraOMV Upstream Sdn Bhd had inked a gas sales agreement with Petroliam Nasional Bhd (Petronas) alongside its partners. The company closed one sen higher at 28 sen.

Hibiscus Petroleum is a direct proxy to crude oil prices by virtue of the company’s position as a pure play exploration and production (E&P) player. Its shares closed 5.5 sen higher at 97.5 sen.

More stable energy prices could incentivise global upstream E&P players to increase their capital activities and help create new opportunities and work for oil and gas (O&G) service and equipment companies in the industry.

Shortly after taking office, newly appointed Saudi Arabian Energy Minister Prince Abdulaziz Salman said he wants OPEC to strengthen and extend its agreement with non-OPEC producers, including Russia.

This reaffirmed OPEC and allies’ decision in July to curb oil production into 2020 to bolster prices against rising US shale production, which has helped the US become the world’s largest oil producer today, and energy demand fears arising from the protracted US-China trade war.

The US produced about 17.87 million barrels of oil per day in 2018, controlling 18% of the world market, but collectively, Saudi Arabia and Russia controlled 23% of world oil production that same year.

Continued and committed production from these leading oil producers and their allies will thus serve to at least reduce or limit the volatility currently facing crude oil prices in 2019.

TA Securities Holdings Bhd analyst Kylie Chan Sze Zan said the Saudi Arabian energy minister’s commitment to further production cuts was in line with expectations of OPEC and their allies actively containing supply in the market.

“Energy demand is the larger concern facing the oil market, but nonetheless, the OPEC-led supply cuts will reduce oil price volatility,” she told The Malaysian Reserve.

It has been a volatile 2019 thus far for crude oil prices, rallying 38.6% to hit a year-high of US$74.57 per barrel (Brent) on April 24 before falling to a year-low of US$56.23 per barrel on Aug 7. Brent oil price has averaged US$64.83 per barrel year-to-date.

“It is a basic fundamental in the market that less volatility will incentivise E&P companies to increase their capital expenditure which will benefit local O&G service providers,” Chan added.

Petronas indicated that it will spend RM30 billion in upstream activities this year — half of which will be spent domestically.

The majority of the listed O&G companies in Malaysia are service providers which are dependent on Petronas for work and are predominately upstream-focused.

Higher spending by Petronas, backed by a relatively stable oil price floor, will thus translate into higher interests for O&G stocks.