PETALING JAYA: The recovery of Brent spot oil price by US$6/barrel to US$30/barrel, is viewed as just a temporary respite, as Saudi Arabia and Russia are unlikely to agree and adhere to drastic daily production cuts of 10 million barrels, as demanded by US President Donald Trump.
According to AmInvestment Bank Research, the Saudi-Russia dispute has a lower impact compared with the massive Covid-19-inflicted demand loss, which the International Energy Agency and oil trader Vitol both estimated at 20 million barrels/day, with some forecasts reaching 30 million barrels from the growing global lockdown.
“This accounts for 25–37% of 2019 global demand,” it said
AmResearch pointed out that the world has essentially begun to shut down in transportation, in which vehicles account for 40% of global crude oil demand, airlines 10% and petrochemical 30%.
“As such, Vitol has indicated that global storage facilities are expected to reach maximum utilisation by the end of this month with the duration of Covid-19 remaining uncertain at this stage.”
Across the globe, the research house said, national oil producers have begun to cut back on production, with Brazil’s Petrobras doubling its daily reduction to 200,000 barrels. “Furthermore, this major offshore producer has signalled intentions to delay payments and renegotiate contracts with its suppliers to conserve its cash flows, a move which it did not resort to in the past,” it said.
For the Malaysian oil and gas sector, it opined that the worst impacted will be those with upstream production sharing contracts such as Sapura Energy Bhd and Hibiscus Petroleum Bhd, followed by fabricators such as Malaysia Marine and Heavy Engineering Bhd and offshore support providers Bumi Armada Bhd and Velesto Energy Bhd.
“Even though companies such as Dialog Group Bhd will benefit from heightened demand for tank terminal storage facilities, we expect project deferrals and cost renegotiations on existing contracts by oil majors to compress margins and volume for specialist/maintenance services as well as engineering, procurement and construction activities,” said AmResearch.
“While VLCC petroleum tanker rates have escalated on the rapid increase in floating storage demand, MISC Bhd is unlikely to capitalise on it in the near term as its large vessels are on long-term charter; yet its LNG vessels may encounter charter terminations, which had occurred during the previous down cycle.”
With that, the research house reiterated its “underweight” call on the sector as it expects the massive global demand destruction from Covid-19 on top of the Saudi-led price wars to continue depressing industry sentiments extensively in the foreseeable horizon.
“As we continue to view the decimation in oil prices and companies’ earnings to be worse than the previous crisis which led to multiple financial distress to O&G corporations, we have already switched to net tangible assets for stocks such as Sapura Energy.”
AmResearch is retaining its “sell” calls for Bumi Armada, Dialog Group, Sapura Energy, Serba Dinamik and Velesto Energy.
