OIL price rising above US$50 per barrel for Brent crude has raised questions on how sustainable is the current rally in oil stocks.
The consensus appears to be that the run-up in oil stocks will be on as long as oil price maintains at current levels but over the long term, factors to watch for would be oversupply, oil inventory and Iranian production.
At the same time, the Saudis and Opec members are struggling with budget deficits and may be forced to curtail production. Also, there is geopolitical risk posed by Russia’s military involvement in Syria.
To Andrew Cosgrove of Bloomberg Intelligence, the current oil price rebound is technical, due partly to short covering and is headline driven; the oversupply situation is likely to last through 2016 and oil price is likely to trade at US$40-US$60 per barrel.
Pong Teng Siew, head of research, Inter-Pacific Securities, expects the oil rally to proceed in fits and starts as hedge funds, freshly armed with assurances that a Fed rate hike is off until December, pile back into long oil positions.
“Oil stocks should, therefore, be looked at,’’ said Pong, adding that practically they are being bought up as a sector but he expects the markets to be more discerning later.
Amidst the uncertainty, some still prefer stocks that are not so directly impacted by the price of oil such as KNM, Dialog and Uzma.
Danny Ng, CEO of Areca Capital, views that producers prefer a slightly higher price between US$50-US$60 per barrel.
“With the Saudis and Opec (Organisation of Petroleum Exporting Countries) members facing budget deficits, they are likely to do the necessary to keep oil price at a more acceptable level. Russia may also ask for a higher price or make a deal with Opec to cut production,’’ said Ng, who sees further potential in Muhibbah, Yin Son and SK Petro.
On the high debts of SK Petro, Ng said the company’s gearing of 1.27 times for financial year 2016 was acceptable for an order book exceeding RM25bil and cash position of RM1.26bil.
Vincent Khoo, head of research at UOB Kayhian, regards the oil stocks rally to be on as long as Brent crude stays above US$50 per barrel although there continues to be daily growth to oil inventory.
Another senior analyst, however, cautions that Iran is set to start exporting oil early next year while US shale oil becomes cheaper to produce. In the short term, oil stocks may rally as long as oil prices are on the uptrend.
RHB Research Institute expects Brent crude to trade between US$50-US$55 per barrel for the final quarter of the year, and maintains its forecast of US$53.3 per barrel for 2015; US$50 per barrel for 2016 and US$60 per barrel for 2017.
Maybank Investment Bank is looking at Brent crude to trade from US$48 per barrel in the fourth quarter of this year to US$50 per barrel in the first half of next year, and US$55 per barrel in the second half of 2016.
Chief economist Suhaimi Ilias said this is based on global growth improving slightly next year after the slowdown this year, as per the recent IMF World Economic Outlook.
This outlook will be underpinned by sustained US and India growth momentum, continued recovery in Europe and Japan as well as a moderate, rather than sharp slowdown, in China. “This should help to absorb some of the excess supplies but will not remove the glut, hence the moderate upside. We also expect the volatile trend in crude oil prices to continue,’’ said Suhaimi.
Independent economist Lee Heng Guie sees Brent oil price hovering between US$50 and US$60 in the first half of 2016.
“The supply and demand convergence is still working its way through until mid-next year. The market needs to see definite supply contraction from US shale oil and major Opec members amid Iran’s re-entry into the oil market.
“We are keeping an eye on Saudi Arabia as it starts managing oil supply while US shale oil shows a sustained drop in production,’’ said Lee.
However, PIRA Energy Group, a closely watched forecaster that predicted the collapse in oil prices a year ago, sees crude prices at US$70 per barrel by the end of 2016 and US$75 a barrel in 2017, said Reuters.
Global oil demand is expected to grow by the most in six years in 2016 while non-Opec supply stalls, Reuters reported, quoting the US Energy Information Administration’s short-term energy outlook.
At the Oil and Money conference in London recently, oil executives said US oil production would start to decline soon unless oil prices rise substantially, and that lower production could pave the way for a spike in the market in future if fuel demand increased.
Delegates at the annual gathering of senior industry officials said world oil prices were now too low to support US shale oil output, the biggest addition to world production over the last decade, said Reuters.
However, some regard the bear market in oil may still be in its early stages. “Historically, we would note that bear markets in oil have tended to last somewhat longer than the current episode (between 11 and 28 years),” Credit Suisse research analysts were quoted as saying by Business Insider Malaysia.
Their view is that oil is oversold at this point, but the market is too optimistic.
Columnist Yap Leng Kuen sees there is still some uncertainty in assessing the rebound in oil price.
source: thestar.com.my
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