Integrated Oil & Gas – Bull In a Bear Market
Several news items that may further support oil prices this week:
1. The IEA says crude oil prices may have bottomed out;
2. Iran’s exports post sanctions have been below expectations;
3. Non-OPEC production is falling in a meaningful way.
On the other hand, a production freeze may be harder to attain as Iran may refuse to join negotiations until it is able to boost production to pre-sanction levels. We maintain our view that the oil market remains fundamentally weak and are NEUTRAL on the oil markets.
¨ We do not believe the rally is sustainable with the fundamentals of the oil market remaining weak, given overproduction, historic high inventories, major capex cuts, and huge layoffs. We believe that there is a true misalignment between the real and the financial world at the moment. At the end of the day, the valuations of these upstream oil & gas stocks would seem relatively expensive – under the current bear market – once the rally ends. For more details, please see our 8 Mar report Integrated Oil & Gas: True Misalignment.
¨ The International Energy Agency (IEA) stated that crude oil prices may have bottomed out, reiterating what we have been saying since February. The agency said Organisation of the Petroleum Exporting Countries (OPEC) production fell slightly by 90,000 barrels (bbls)/day (bpd) in February to 32.61mbpd, with losses from Iraq, Nigeria and the United Arab Emirates (UAE) partly offset by Iran. Iran’s exports increased by only 220,000bpd vs an expected initial export of 500,000bpd. The IEA estimates that output from non-OPEC producers are expected to fall by 750,000bpd (of which 530,000bpd is from shale oil producers) to 57mbpd in 2016, with additional demand for 2016 expected at 1.2mbpd, with risks more on the downside than upside. Although this does not mean that the worst is over, there are signs that prices may have bottomed out.
¨ Production freeze update. A meeting among oil producers to discuss a global pact on freezing production is set to take place in Russia on 20 Mar. However, whether or not the meeting would move forward remains uncertain at this juncture, as Iran may refuse to cooperate. Iran has so far rejected freezing its output at January levels and has repeatedly said that it plans to up its production to pre-sanctions level. Kuwait has indicated that it is to join the production freeze if all other producers also freeze output.
¨ Crude oil price forecasts. We expect markets to remain highly volatile. We are expecting a gradual rebound in crude oil prices, with our average crude oil price (Brent) forecasts at USD30/USD35/USD40/USD45/bbl for 1Q16-4Q16 respectively. So the current rally may put oil prices slightly ahead of our forecasts. We maintain our crude oil prices at USD37.50/USD45/USD60/bbl for 2016-2018 respectively.
¨ Regional Top Picks: We recommend stocks with strong fundamentals under the current volatile markets, ie China Resources Gas (HK:1193), AKR Corporindo ($AKRA
), SapuraKencana Petroleum, Keppel Corp (SG:BN4) and PTT Global Chemical. Inside this report, we include a list of recovery stocks that have the highest correlation to the Brent.$IHSG