Regional Oil & Gas - DBS Research 2018-06-25: OPEC’s Moderate Output Boost Soothes Fears

Regional Oil & Gas - DBS Vickers 2018-06-25: Opec’s Moderate Output Boost Soothes Fears OPEC Meeting KEPPEL CORPORATION LIMITED SGX: BN4 SEMBCORP INDUSTRIES LTD SGX: U96 SEMBCORP MARINE LTD SGX: S51

Regional Oil & Gas - Opec’s Moderate Output Boost Soothes Fears

  • OPEC and non-OPEC could increase production by up to 0.85mmbpd, lower than expected.
  • Supply boost to offset production losses from Venezuela and Iran sanctions.
  • Maintain our Brent forecast of US$70-75/bbl for 2018 and US$65-70/bbl for 2019.
  • O&G stocks set to regain ground.

What’s New

Agreements reached but no concrete numbers.

  • The Organisation of Petroleum Exporting Countries (OPEC) concluded its general meeting last Friday. It met with non-OPEC members on Saturday to thrash out details of a proposed supply boost to deal with an increasingly tight near-term oil market amid declining supply from Venezuela and expected export restrictions on Iran in the coming months following renewed US sanctions. In both meetings, members reached an agreement to increase production, but fell shy of stating specific output targets.
  • The OPEC meeting noted that OPEC members had reached conformity of 152% of its 1.2mmbpd output cut in May 2018 and would strive to bring this down to 100% conformity from 1 July 2018 to the end of the year. The meeting between OPEC and non-OPEC members similarly noted that they had reached conformity of 147% of their combined 1.8mmbpd output cut in May 2018, which would be voluntarily brought down to 100% from 1 July 2018.
  • This seems to imply a maximum increase in production of around 0.6mmbpd from OPEC members and around 0.85mmbpd combined from OPEC + non-OPEC members in the coming months. However, the actual increase could be much lower.

Disagreements with Iran.

  • While Saudi Arabia and Russia have openly favoured increasing OPEC/non-OPEC production quotas by around 1-1.5mmbpd, Iran has been one of the strongest opposing voices and even walked out of a Joint Ministerial Monitoring Committee meeting one day prior to the OPEC general meeting. Steep production increases and lower oil prices would not be beneficial to Iran. It is likely to lose export market share and revenue due to the US sanctions. Countries like Venezuela also opposed any move that would weaken oil prices.
  • A compromise seems to have been made, with the lack of clear cut numbers and production targets between member countries. These might come later but for now, not many countries other than Saudi Arabia and Russia are capable of significant production increases over the next 6 months.
  • OPEC’s overall spare capacity is only at 1.8mmbpd, according to US Energy Information Administration (EIA) data. Historically, anything below 2.0-2.5mmbpd spare capacity for OPEC is considered tight.

What’s the Impact

We remain constructive on oil price outlook.

  • The agreements reached in Vienna are not much of a surprise. They seek to offset production losses from Venezuela and to smaller extent, Libya and Angola. Oil prices reacted positively to the outcome of the meeting. There was no hint of an undue flooding of the market for the coming months.
  • As we move into the second half of the year, which is typically a high demand period, inventory moderation should continue to support oil prices despite the higher supply levels. The next OPEC meeting is in early December, and we believe it is likely that the production cut agreement may not continue in its current form in 2019, leading to some volatility around that time frame.
  • As far as US shale is concerned, the good news for oil price is the increasing infrastructure and pipeline constraints being felt in the prolific Permian Basin that are limiting further production growth. This could prompt lower shale supply growth expectations in 2019, unless bottlenecks are removed.
  • We are currently projecting Brent crude oil prices to average between US$70-75/bbl in 2018 and US$65-70/bbl in 2019, and believe there are more upside than downside risks to these projections.


O&G stocks to regain ground.

  • On average, regional oil and gas stocks fell 10-15% in the month ahead of the OPEC meeting, alongside a broad market weakness.

We reiterate our confidence on sector recovery.

  • Oil price above US$70/bbl remains attractive and may incentivise sanctioning of upstream projects.
  • In the upstream space, Petrochina (TP HK$7.60; +33% upside) seems to have been oversold following market talks of potential nationalisation of pipeline assets. The selloff is unwarranted. Petrochina should see revaluation gains. This is an important step towards market-based gas pricing reform that would eventually benefit Petrochina. 
  • We also continue to like CNOOC (TP HK$16; +30% upside) , Sinopec (TP HK$9;+44% upside) and Medco (TP Rp1,720; +74% upside).

Singapore rig builders’ stock prices have fallen back to end 2017 levels.

  • We believe these are a good entry levels.
  • Sembcorp Industries (SCI; Target Price S$4.40; +59% upside) has been particularly weak, underperforming Sembcorp Marine (SMM; Target Price S$2.90; +48% upside) and Keppel Corp (Target Price S$10.20; +45% upside)

Pei Hwa HO DBS Vickers | Suvro Sarkar DBS Vickers | https://www.dbsvickers.com/ 2018-06-25
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