Sector News Flash:
Regional Oil & Gas (Overweight)
Quite a historic deal, but…..
Regional Oil & Gas (Overweight)
Quite a historic deal, but…..
A
historic co-ordinated effort has been made to cut crude oil production by
1.758mbpd. OPEC and non-OPEC members have agreed to cut 1.2mbpd and 0.558mbpd
respectively. A monitoring committee has been established to monitor
compliance. We believe that sentiment for the oil markets would be bullish
right through to end-Jan. At such time, we expect more volatility as Trump’s
energy policy would be announce, and the first month of production numbers
reported. OVERWEIGHT on the sector, with regional Top Picks – PTT, PTTGC,
PCHEM, SAKP, KEPPEL, SCI, PGAS and AKR.
♦ Quite a historical
deal, but…
Quite a historical deal, but…After this deal, the market would be closely
watching the crude oil production from both OPEC and non-OPEC members. We
believe the lack of details at the moment make this deal seem quite a weak:
i. We note that there are no legal binding
course to take should
production exceed the pledged cuts;
ii. The agreement is also quite flexible and individual
countries are left to decide how to implement production cuts;
iii. Benchmark: Production cuts have not been clearly
earmarked. For OPEC, we believe it was defined as OPEC’s October production
from its secondary source. However, for non-OPEC members, this has not been
clearly defined - where a natural decline of crude oil production are
also allowed to be considered as production cuts for non-OPEC members. This
leaves quite a large room for interpretation, in our opinion;
iv. Enforcement: It remains to be
seen how countries that have independent major oil producers operating the
fields would cut production (eg Algeria has BP, Total and ENI among others
working in their country).
♦ Supply deficit
expected in 2017F.
We revise our assumption to assume full compliance for six months with OPEC
production cut of 1.2mpbd and 0.558mbpd for non-OPEC members. This adjustment
leaves the full year 2017F supply deficit unchanged at 0.8mpbd. Inventory
overhang remains, but a more rapid rundown in inventory is expected in the 1H17.
Note, our initial assumption for 2017F was an additional supply of 300kbpd
increase in production from non-OPEC producers, with a 1.2mbpd cut in
production for OPEC members for a maximum of 12 months. This would result in
supply deficit of 0.8mpbd as well.
♦
Our
crude oil price forecast of USD60/bbl for 2017F and the longer-term
is maintained, with the markets now looking to be more bullish than prior to
this OPEC deal. However, there is much downside risk going forward. The
monitoring and implementation of the production cuts could result in
non-compliance, sending crude oil prices back into more negative sentiment.
Shale oil producers could return at a much faster pace. Finally, Trump’s
actions could provide further challenges for the upstream sector.
Kannika Siamwalla,
CFA
Head of
Regional Oil &Gas
RHB Securities (Thailand) PCL
RHB Securities (Thailand) PCL
