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Analysts see higher oil prices in 2019

Crude oil prices have gone on a freefall, down by over 37% in less than three months. However, analysts foresee the bearish trend to be temporary, with higher oil prices in the offing next year.

The positive outlook comes as good news for the federal government’s coffers as well as the Malaysian oil and gas (O&G) sector, which had witnessed a disappointing earnings performance in the third quarter of 2018.

Looking into 2019, pundits believe the O&G sector stands to benefit from the projected recovery in crude oil prices and the expected increase in both upstream and downstream activities.

CIMB Research chose the O&G sector as one of its four top picks in 2019.

Maybank IB Research and PublicInvest Research have maintained their “positive” and “overweight” views on the sector, respectively.

By mid-day yesterday, the international benchmark Brent crude price has fallen by 37% since its year-to-date peak in early October and hit US$54.33 per barrel. The current price level is Brent’s lowest in 14 months.

The West Texas Intermediate (WTI) crude took a worse beating, with a 39% drop in price since its year-to-date peak in early October. The US benchmark stood at US$46 per barrel at 12pm yesterday.

Globally, the ongoing oil price volatility is attributable to the unwinding of net long positions by traders, following concerns over a possible glut in global oil supplies relative to slowing global demand.

Crude oil prices have also remained depressed, given that the supply from major oil producers such as the United States, Russia and Saudi Arabia have reached or nearing all-time highs.

According to Socio-Economic Research Centre (SERC) executive director Lee Heng Guie, the depressed oil price environment is unlikely to be sustained, with global oil demand expected to remain healthy amid slowing global growth.

“The decision by the Organisation of the Petroleum Exporting Countries (Opec) and its allies to start cutting global oil supply by 1.2 million barrel per day from January will help the market re-balance in the first half of 2019.

“Along with the cartel’s decision, Russia also indicated its willingness to reduce output along with Canada’s production, which could start to decline due to a lack of pipelines,” he told StarBiz.

Lee estimates Brent crude prices to average at US$60 to US$65 per barrel in 2019.

Describing the recent market dynamics as “completely overblown,” a more optimistic Stephen Innes, Oanda Corp head of trading for Asia-Pacific, expects an average Brent price of US$70 per barrel in 2019.

He said, however, there will be high oil price volatility in early 2019 as Opec undertakes supply tweaks amid gloomier macroeconomic prospects that weigh on sentiment.

“The problem with oil markets right now is the lack of passive investor demand or the lack of funds that can only buy long oil positions. I think this is a seasonal thing but we will soon find out in 2019,” said Innes.

Commenting on the domestic O&G sector, Innes cautioned that the industry players will struggle for capital injections until Brent price reaches US$70 per barrel or above.

Moving forward, PublicInvest Research said the O&G sector may surprise with potential earnings uplifts.

“We see stabilisation of crude oil prices above the US$60 per barrel mark encouraging further activity across the value chain,” it said.

In its latest activity outlook for 2019-2021, Petronas maintained its prudent view on the industry outlook and said that it will “respond with cautious optimism particularly on new capital projects”.

The three-year outlook portrays growth in brownfield activities particularly in ‘rigs’ category and its supporting services, such as marine vessels.

“Base activities in maintenance is projected to increase for both onshore and offshore in tandem with this outlook,” stated the national oil producer.

Petronas has pegged the oil price outlook at US$60 to US$70 per barrel in its 2019-2021 outlook report as compared to US$50-US$80 in its previous 2018-2020 outlook.

On Dec 23, Finance Minister Lim Guan Eng said that the government could recalibrate Budget 2019 if average Brent price falls below US$50 per barrel.

The budget was prepared on the basis of oil price at an average of US$70 per barrel.

SERC’s Lee said a US$1 decline in oil price would translate into a loss in federal government revenue of RM300mil.

However, he added that oil price decline is not entirely bad.

“Lower oil prices also mean low fuel subsidy. Cheap fuel prices are likely to lift consumer spending.

“In terms of the oil price fluctuations’ impact on exports and economic growth, it is expected to be manageable and can be mitigated by contributions from other major economic sectors such as services and manufacturing,” he said.
Source: The Star Malaysia

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