PETALING JAYA: The unstoppable streak of the oil price rally may seem like the end of the tunnel is near for the oil and gas (O&G) sector.
But amid the optimism that the market is pricing in, experts that are monitoring the sector closely believe that it is not yet all rosy.
Forecasting thunderstorms ahead, analysts and economists believe Brent crude oil has run ahead of its fundamentals as it surged above US$70 per barrel, saying that current prices are unsustainable.
The Brent opened at US$69.97 yesterday, hitting US$70 just moments after the opening bell, marking a 21-month high on the back of reports of a drone attack on Saudi Aramcos petroleum tank farm in Ras Tanura while shrapnel from a ballistic missile fell near Saudi Aramcos residential area in Dhahran, both in Saudi Arabia.
The kingdoms Energy Ministry said neither attack resulted in injury or loss of life or property.
The last time the Brent crude oil hit above US$70 per barrel was in May 2019 at around US$72.
From the plunge on April 21 last year to US$19.33 when the West Texas Intermediate (WTI) went sub-zero, the Brent has recovered 262% in only 11 months, close to pre-pandemic levels even when most international borders remain closed.
Back in 2019, global demand was slightly above 100 million barrels per day (mbpd) and as for 2021, the Paris-based International Energy Agency (IEA) projected that demand would reach 96.4 mbpd, recovering around 60% of volume lost in 2020 due to Covid-19.
Currently, demand is estimated to be about 80 mbpd.
BIMB Securities Research O&G analyst Azim Faris Ab Rahim said he sees a downside risk to the recent oil price rally, which mainly stemmed from unused capacity held up by the Organisation of the Petroleum Exporting Countries, Russia and other allies (Opec+).
We think there is an increasing likelihood of an oil price shock, possibly over the second half this year to 2022, on the premise that the United States shale supply response could trail behind the oil demand recovery.
This is under the assumptions that global oil demand recovers to pre-pandemic levels by the end of 2021 and that the US shale oil supply will recover to pre-pandemic levels by 2023, according to the Energy Information Administration (EIA) estimates, he told StarBiz, adding that thereafter, the oil price will be expected to normalise.
The research houses long-term oil price outlook is US$60 per barrel.
Azim maintained his view that local activity will pick up in 2022, regardless of the price of oil. He believed the lack of investment from 2015 to 2020 will translate into more projects maturing within the next few years.
Hong Leong Investment Bank Research analyst Low Jin Wu also felt that the current price is unsustainable, adding that there were many tailwinds that affected the oil market in the past few weeks.
The colder than expected temperatures in the Gulf Coast is one unforeseen catalyst for oil prices besides Opec+s surprise rollover of its production cuts.
I believe that production in the US would resume once the deep freeze in Texas subsides and as long as oil prices remain at the US$70 per barrel, Opec+ would find it very tempting to ease its production cuts.
On a year-on-year basis, the fundamentals of the oil market is significantly stronger but at US$70 per barrel, Brent is probably slightly ahead of its fundamentals, he said, adding that it should average at about US$60 to US$65 this year.
Low is confident that more jobs will come to the Malaysian industry players if the Brent can average above US$60 per barrel this year.
Petronas had a very lacklustre year in 2020 arising from Covid-19 and low oil prices, recording one of its lowest operating cash inflow and lowest capex spending in many years. While I do not expect their capex to return to pre-Covid-19 levels, capex in 2021 should see a material increase of some 20% from 2020, he added.
Kenanga Research analyst Steven Chan on the other hand, felt that the price of oil would stabilise.
He said the Opec+s decision to maintain output cuts, the Texas freeze and recovery in demand has led to faster-than-expected drawdown in crude inventories globally.
As long as the demand and supply dynamics remain, oil prices should be stabilising at these levels.
Opec+ could easily increase output levels in one of their upcoming monthly meetings and there would not be any significant delayed reaction from oil prices following this. Nonetheless, even if oil prices were to hover at around US$60 to US$70 a barrel, this will still be a healthy enough level to spur resumption of activities, Chan said.
Juwai IQI chief economist Shan Saeed said the price of oil at this juncture is volatile and that O&G companies would be taking a cautious stance.
Capex will not come back unless oil prices are sustainable between US$73 to US$87 per barrel.
This (surge) could be short term. The price of oil might even go down to US$60 or US$55, he said, adding that three major factors affect the oil market – the depreciation of the US dollar, the opening up of economies on the back of inoculation efforts and geopolitical risks, of which there are currently 73 ongoing civil wars.
The oil price rally, which has moderated to US$69.49 as at press time, sent a wave of optimism into Bursa Malaysia yesterday, raising the FBM KLCI by 11.69 points or 0.73% to 1,611.81 points.
Petronas chemical arm Petronas Chemical Group Bhd was the leader of the benchmark index after adding 53 sen or 6.78% to RM8.35.
The KL Energy Index was the best performing index locally yesterday, hitting a one year high of 985.19 points after advancing 33.68 points or 3.54%.
Dagang Nexchange Bhd (DNeX), which has diversified into O&G recently, was the second most active counter yesterday while its warrant came in first.
Among the top 10 most traded stocks yesterday were Sapura Energy Bhd, Sealink International Bhd, Velesto Energy Bhd, KNM Group Bhd and Bumi Armada Bhd.