RHB Indonesia - Oil Price Rally - Is This Sustainable? Unknown Rabu, 27 September 2017




Good morning,

Oil Price Rally – Is This Sustainable?

Crude oil price is nearing USD60/bbl – whether or not the rally is sustainable depends on what OPEC and non-OPEC members decide to do, once the production cut agreement expires in Mar 2018. Note that there was no agreement for an extension of the production cut during the September meeting. We believe the reason for the rally is possibly attributable to geopolitics (Kurdistan independence referendum), as well as improving fundamentals in the oil market. Global stocks are declining, demand for crude oil remains robust, US drilling rigs are moderating, and US production seems to be increasing at a measured pace. Our Top Picks around the region remains skewed towards downstream players rather than upstream – AKR Corp, Bangchak Corp, Keppel Corp, Serba Dinamik, Star Petroleum, and Yinson.


¨ We are now very near USD60 per bbl. Whether or not this rally is sustainable will depend on what the Organisation for Petroleum Exporting Countries (OPEC) and non-OPEC members decide on what to do after Mar 2018, when the production cut agreement expires. Also keep in mind that higher oil price would also entice more supply into the global market, and this would only work if demand increases at similar pace. We are forecasting USD55 per bbl and USD57 per bbl for 3Q17/4Q17 (average Brent, with 3QTD at USD52 per bbl). For 2017, 2018 and 2019, we expect per bbl crude oil price to average at USD54, USD55 and USD60 respectively. It appears that the current oil price rally is due to geopolitical factors but we believe that the oil market is also improving fundamentally.
¨ The Kurds in Iraq held a referendum for its independence from Iraq on Monday, defying regional demands that the ballot be abandoned. Turkey and Iran, which also have a minority population of Kurds, opposed the referendum. Iran has closed its airspace bordering the Kurdish region, while Turkey has warned that it will close the valves on oil exports from the landlocked Kurdish region.
¨ How is this relevant to the oil & gas industry? Iraq’s Kurdish region holds c.45bn bbl of oil reserves. In 2016 it produced 545kbpd of crude oil and is expected to produce 600kbpd in 2017. This represents 12% of Iraq’s crude oil production (where Iraq is the second largest crude oil producer within OPEC, with production of c.4.4mbpd). If there is any blockade to the flow of oil, and supplies decline by c.500kbpd in 4Q17, then crude oil price could average USD61 per bbl based on our estimates. However, we are not in a situation of crude oil shortage, and any shortfall can and will most likely be fulfilled by other producers.
¨ Fundamentals are improving, with much stronger global demand. US drilling activity has been moderating (744 rigs as of 22 Sep vs this year’s peak of 768 rigs in Aug) with measured increases in US production. The US Energy Information Administration (EIA) is now looking at US production of 9.25mbpd (+0.4mbpd) and 9.84mbpd (+0.59mbpd) for 2017 and 2018 respectively, with Brent averaging at USD51.07 per bbl and USD51.58 per bbl for 2017 and 2018 respectively.
Global crude oil demand has been strong with 2Q17 demand at 1.9mbpd, and expected to moderate to 1.2mbpd in 3Q17. Another boost in demand is expected in the final quarter of this year at 1.9mbpd. For annual demand, the International Energy Agency (IEA) is now expecting 1.5mbpd and 1.4mbpd in 2017 and 2018 respectively.
The Aug OPEC production cut was 94% compliant, with total production cut of 1.104mbpd vs the target of 1.176mbpd, while non-OPEC production cut was 119% compliant, with a cut of 648kpbd vs its target cut of 546mbpd. Global stocks fell 0.5mbpd in 2Q17, although Organisation for Economic Co-operation and Development (OECD) stock remains at 219mbbl above the 5-year average. (Kannika Siamwalla, CFA)

Link to daily report: Indonesia Morning Cuppa 270917

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Best regards,

Andrey Wijaya
Senior Vice President
Research Analyst – Auto, Consumer, Cement
PT RHB Sekuritas Indonesia

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