Regional Oil & Gas - DBS Research 2019-04-26: Higher For Longer This Time?

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Regional Oil & Gas - Higher For Longer This Time?

Revising up 2019/20 Brent crude oil price forecasts by US$5/bbl to US$70-75/bbl.
Oil prices likely to stay elevated in near term following surprise non-renewal of Iran waivers.
OPEC’s stance will be interesting; any increase in production in 2H19 likely to be moderate at best and impact will only be felt later in the year.
Favourable oil price trajectory continues to support oil & gas capex and demand for oilfield services.

On Monday, the Trump administration announced that the US would remove the waivers granted to several countries to partially continue importing Iranian oil back in November 2018, when the US sanctions first came into place. Once the 180-day initial waiver period ends in early May, the eight countries that the US had granted waivers to – China, India, South Korea, Japan, Taiwan, Italy, Greece and Turkey – will have to completely halt their purchases from Iran or risk being hit by US sanctions.
This hardline stance is a bit unexpected, given that the US will risk pushing oil prices, and in turn, domestic pump prices higher ahead of peak driving season. We had earlier anticipated that the waivers would continue, albeit at a reduced quantum, to arrive at some sort of compromise solution for the market.

Iran production and exports in 1Q19 are down to around 2.7mmbpd and 1.2mmbpd respectively, falling by more than 1.1mmbpd from early 2018 levels, before the US announced sanctions in May 2018. Currently, China is the biggest importer of Iranian oil at close to 0.6mmbpd, followed by India at 0.3mmbpd.
Given that Chinese imports are unlikely to be significantly dented by the threat of US sanctions – given the ongoing trade and other tensions and lack of assets affected by US jurisdiction – we expect Iran oil production and exports to fall by between 0.3- 0.5mmbpd from May 2019 onwards. This will tighten the supply-demand equation again, going forward, and put the market in a marked supply deficit situation from 2Q19 onwards, pending OPEC’s decision later in June on whether or not to extend the production cuts.

OPEC and non-OPEC allies will meet in June to decide the future of the 6-month production cuts that came into place from the beginning of 2019. Given the above decision from the Trump administration, combined with increasing tensions in Libya and Venezuela, it is very likely that the production cuts may not continue in their existing form, as there would be a risk of overheated oil prices, which Saudi and its Gulf allies have in the past been averse to, for fear of destroying demand in emerging countries.
The US administration appears confident that their allies like Saudi Arabia and UAE would increase production to ensure there is no supply shock for the market, but we believe these countries had learnt their lesson back in late 2018, when they pre-emptively increased production only for oil prices to crash following Trump’s surprise decision to provide waivers to importers of Iranian oil.
This time around, we expect any increase in production from OPEC to be moderate at best and only after the full impact of sanction waivers’ expiration has been assessed.

Brent crude oil prices are currently hovering around the US$75/bbl mark, and we expect prices to remain elevated in the US$75- 80/bbl range in the immediate future, and volatility will increase in the run-up to the OPEC meeting in June. Given that OPEC’s response in terms of adjusting supply will likely be moderate at best, 3Q19 could see prices consolidating before recovering again in 4Q19 as the IMO 2020 deadline draws nearer, reducing supply of heavy sour grades. However, US crude oil production, which has historically surprised on the upside, remains a wild card.
Despite declining rig counts in the shale regions, owing to muted capex growth and a multitude of technical problems affecting productivity growth, a larger-than-anticipated increase in US crude supply from 3Q19 onwards could cap optimism to an extent, as new pipelines become operational in the Permian.
Given the tighter supply-demand dynamics in our model, we now project Brent crude oil prices to average at US$70-75/bbl in 2019/20, up from our previous US$65-70/bbl assumption.
Outlook for oil producers and oilfield service providers thus remain bright in the foreseeable future.

The favourable oil price environment and increasing evidence of capex recovery are expected to continue driving the re-rating of oilfield service providers. Our top picks are: Anton (Target Price HK1.60; +33%); COSL (Target Price HK$10.20; +17%), SEMBCORP MARINE LTD (SGX:S51) (Target Price S$2.40; +34%), Serba Dinamik (Target Price RM5.70; +38%) and Sapura Energy (Target Price RM0.41; +27%).
Other well-positioned beneficiaries include Transocean, Hilong, Kim Heng.
See also our recent sector report on oildfield services: Oilfield Service Providers - DBS Research 2019-04-12: Tide Is Turning For Offshore.

Suvro Sarkar DBS Group Research | Pei Hwa HO DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-04-26

SGX Stock Analyst Report BUY MAINTAIN BUY 3.900 SAME 3.900

BUY MAINTAIN BUY 2.400 SAME 2.400

HOLD MAINTAIN HOLD 0.200 SAME 0.200