RHB Indonesia - Regional Oil & Gas - Fossil Fuel To Remain The Fuel Of Choice Unknown Jumat, 08 September 2017




Good morning,

Regional Oil & Gas – Fossil Fuel To Remain The Fuel Of Choice

OPEC and non-OPEC members are looking to extend production cuts by another three months at the upcoming 22 Sep meeting. Although this may be positive for the oil market, it may not be enough. We expect 2018 to be another challenging year, with a c.0.88mbpd oversupply. On another note, France has also recently announced an oil & gas E&P ban on its territories by 2040, and many countries moving towards a similar ban on fossil fuels. Yet, as EV sales remain <2% of total vehicles sold last year, we believe fossil fuels would remain the fuel of choice for quite a long time to come. Maintain OVERWEIGHT on the sector.


¨ Oversupply remains a concern. Although we expect a robust global oil demand growth of 1.4mbpd, we do not believe that it would be enough to offset the 2.2mbpd of extra supply that is still expected to enter next year. This indicates that crude oil supply would be in excess by 0.88mbpd. We therefore expect 2018 to be another challenging year for the oil market. We lower our crude oil price forecast for 2018 to USD55.00/bbl, with 2017 and longer-term crude oil estimates maintained at USD54.00/bbl and USD60.00/bbl respectively.
¨ 22 Sep Organisation of the Petroleum Exporting Countries (OPEC) meeting. The media reported that OPEC and non-OPEC members are looking to extend production cuts for another three months at the cartel’s upcoming 22 Sep meeting. While such a move may be positive for the oil markets, we do not believe it would be enough as:
i. Extending production cuts by another three months would result in an additional average supply of 1.8mbpd (assuming full compliance of 1.2mbpd), with an oversupply of 0.44mbpd;
ii. Extending production cuts by another nine months would result in an additional supply of 1.22mbpd for the year (assuming full compliance) and would result in a deficit in supply by 0.16mbpd.
¨ We believe that OPEC and non-OPEC members should be pushing for another 9-month production cut extension. Our view of the oil markets is that production cuts may need to be a permanent fixture. It is possible that producers would have to revert back to a quota system as, without such a mechanism, the markets may collapse once again. We do not rule out such a possibility going forward.
¨ End of an era? France recently announced plans to pass a legislation that phases out all oil & gas E&P activities in its mainland and overseas territories by 2040 – the same year it plans to end the sale of diesel and gasoline vehicles. We believe the impact would be rather limited for the oil & gas sector as France produces c.15kbpd of crude oil. However, many countries and automakers have started to embrace electric vehicles (EVs), with some countries moving towards banning gasoline- and diesel-fuelled vehicles in the future. Volvo has also announced a landmark policy of not having any more fully gasoline- and diesel- fuelled cars by 2019 and 2020 respectively.
¨ The impact of such measures by automakers and countries in this sector would only be felt over the longer term, in our opinion. Although total sales of EVs have surged YoY in China, Europe and US, EVs and plug-in hybrid electric vehicle (PHEVs) only make up <2% of sales in these respective countries. No doubt, the EV revolution is on a path to sustainable growth and development. However, from the total number of vehicles sold last year, fossil fuels evidently remain the fuel of choice on a global scale. Our view, as highlighted in the Regional Strategy: The Dawn Of E-Mobility thematic report dated 29 May 2017, has not changed. (Kannika Siamwalla, CFA)

Link to report: Fossil Fuel To Remain The Fuel Of Choice
Link to daily report: Indonesia Morning Cuppa 080917

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Best regards,

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

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