OPEC+ production cuts necessary, but inadequate as demand concerns linger

India has lowered its demand by 70%, adding to the unprecedented oil demand devastation around the globe


THE move to cut oil production by the OPEC+, with Saudi Arabia and Russia leading the pack, is inadequate but necessary in the near term to limit supply, but demand remains a concern, said oil experts.

Oil prices have been volatile in the past several months due to the Covid-19 pandemic and the petroleum war between giant oil producers Saudi Arabia and Russia.

The OPEC+ last Thursday agreed to slash oil output by 10 million barrels per day (bpd) in May and June, in an effort to bolster battered oil prices in the face of Covid-19.

Yet Brent crude sank 4.14% to US$31.48 (RM135.68) per barrel and West Texas Intermediate crude plunged 9.29% to US$22.76 per barrel last Friday, as all time-low demand is seen outweighing the output reduction.

AxiCorp Financial Services Pte Ltd global chief market strategist Stephen Innes said while supply dynamics will have much less influence over prices after the production cut, still, markets will need to weather the constant demand-side storm until the production cuts come into effect in May.

“Unfortunately for oil bulls, demand may plunge by as much as 27 million bpd in April, a decline more massive than anything that has occurred in the history of oil.

“How much of this is in the price is yet to be seen. Also, complicating matters is how quickly the sudden stop in demand sieves back to the wellhead capping dynamics,” he wrote in a note on Saturday.

This week, a more heavily weighted shift to demand dynamics is expected, suggesting that storm clouds for oil prices will continue to build on the horizon.

Even more worrisome for the commodity is that India, the world’s third-largest consumer of crude oil, has lowered its demand by 70%, adding to the unprecedented oil demand devastation around the globe.

Public Investment Bank Bhd economist Dr Rosnani Rasul said oil prices may endure a heightened period of volatility in the immediate term due to negative news flow on Covid-19, exacerbated by rising case and death numbers in the US, UK, and Europe compared to China, the epicenter of the pandemic.

“This may add to the already fragile sentiment on oil and may cap its rise even when China’s economy is expected to rebound post-Covid-19,” she said in a report last Friday.

OCBC Treasury Research economist Howie Lee said countries like Brazil, China, and Mexico are likely to agree to some form of short-term supply curbs, given the urgency of the coronavirus situation.

Following the bleak yet bearish outlook for the oil and gas (O&G) sector, most local players — except those in storage services — will be adversely affected.

AmInvestment Bank Bhd analyst Alex Goh said those with upstream production sharing contracts such as Sapura Energy Bhd and Hibiscus Petroleum Bhd will suffer from lower prices and offtake.

This would be followed by fabricators such as Malaysia Marine and Heavy Engineering Holdings Bhd and offshore support providers Bumi Armada Bhd and Velesto Energy Bhd.

“While service providers such as Dialog Group Bhd will benefit from heightened demand for tank terminal storage facilities, we expect project deferrals and cost renegotiations on existing contracts by oil majors to compress margins and volume for specialist or maintenance services, as well as engineering, procurement and construction activities,” he wrote in a note.

AmInvestment is staying ‘Underweight’ on the sector as fair values of the stocks under its coverage remain pegged to five-year price-to-book ratio lows.

“As we continue to view the decimation in oil prices and companies’ earnings to be worse than the previous crisis which led to multiple financial distress to O&G corporations, we retain our ‘Sell’ calls for Bumi Armada, Dialog Group, Sapura Energy, Serba Dinamik Holdings Bhd and Velesto Energy,” Goh added.

Meanwhile, Affin Hwang Investment Bank Bhd said the supply cut came sooner than expected, though its concern still lies in global oil demand.

The research house is keeping its earlier Brent oil price assumption averaging US$30 to US$35 per barrel for 2020 and US$35 per barrel for 2021.

“We maintain our ‘Underweight’ call on the sector retaining our view that Petroliam Nasional Bhd could reduce capital expenditure spend- ing affecting activities within the sector. For sector exposure, we only favour Dialog, a beneficiary of a low oil price environment from their tank terminal exposure,” it said.