Kenanga Research trimmed its 2024 Brent crude price assumption to US$84 per barrel, down from US$86 per barrel.
PETALING JAYA: Oil behemoths other than the United States are slashing their output going into 2024, but this has not stopped market experts from lowering their crude oil price forecasts for next year.
As for Malaysia, whose Budget 2024 was based on a Brent oil price assumption of US$85 per barrel, the lowered forecasts – while not alarming – are not to be taken lightly.
About two weeks ago, the US Energy Information Administration (EIA) cut its Brent-grade average spot price forecast for 2024 by over 11%.
The new estimate at US$83 per barrel is only marginally higher than this year’s forecast of US$82.
A day after the EIA’s cut, J.P Morgan Research said Brent oil prices will remain “largely flat” in 2024 at US$83 per barrel, adding that it could edge down a further 10% in 2025.
Kenanga Research was the latest entity to revise its forecast down, given the slightly weaker demand outlook next year, particularly from China.
In a note yesterday, the brokerage trimmed its 2024 Brent crude price assumption to US$84 per barrel, down from US$86 per barrel.
Kenanga Research analyst Lim Sin Kiat has a “conservative” assumption on global crude demand.
“In our view, demand for crude oil will remain the major concern for the oil market in 2024, primarily due to uncertainty in demand from China and the United States, rather than supply. Hence, the upside to crude oil prices remains capped.
“Nevertheless, we believe the downside to Brent crude prices from the current level is also limited, as the Organisation of the Petroleum Exporting Countries and its allies (Opec+) has shown resolve in cutting production to support prices.”
Opec+ produced about 50% of the world’s oil in 2022, and they control over 70% of the world’s proved reserves.
Last month, Opec+ agreed to reduce oil production voluntarily by 2.2 million barrels per day (bpd) starting in January 2024.
Saudi Arabia, the world’s biggest oil exporter, said it will roll over the one million bpd cut into the first quarter of 2024, while Russia agreed to cut 500,000 bpd.
Saudi Arabia has all the reasons to continue the voluntary production cut to fund its ambitious Vision 2030 plan. Russia, on the other hand, requires high oil prices to continue, funding its war efforts in Ukraine.
In contrast to Opec+, the world’s biggest oil producer, the United States, is actively ramping up its domestic oil production, led by shale oil drillers in Texas and New Mexico’s Permian Basin.
In fact, it was recently reported that the United States is producing more oil than any country in history.
According to S&P Global Commodity Insights, the United States is set to produce a global record of 13.3 million bpd of crude and condensate during the fourth quarter of this year.
Nevertheless, Kenanga Research’s Lim expects the crude oil market’s surplus to narrow in 2024 to 0.3 million bpd, compared to 0.5 million bpd in 2023.
“Also, our base case assumes oil demand to grow by 1.2 million bpd in 2024, with production increasing at a slower rate of one million bpd,” he said.
Looking ahead, Kenanga Research remained “neutral” on the outlook for the oil and gas (O&G) sector.
However, it continued to have a preference for upstream service providers, especially those in brownfield projects.
Lim said that the upstream capital expenditure (capex) of Petroliam Nasional Bhd (PETRONAS) will sustain its upward trajectory in 2024, as its cost structure could accommodate Brent crude prices of as low as US$75 per barrel.
“Anticipating a 2024 capex expenditure of around RM60bil, with a larger proportion allocated to upstream activities, we expect PETRONAS to address the ageing infrastructure of oil production platforms in Malaysia.
“This strategic move is anticipated to benefit upstream service providers under our coverage, particularly amid the reduced supply of upstream contractors due to underspending by PETRONAS and other oil producers since the onset of Covid-19.
“We anticipate that the majority of PETRONAS’ upstream capex will continue to be directed toward brownfield projects (existing fields or extensions to producing oil fields) due to their lower risk profile and capex requirements.
“While greenfield projects are expected to emerge in 2024, their scale is not likely to match the levels seen in 2013-2014, as oil producers show less willingness to commit to major greenfield projects with long development cycles amid global energy transition trends,” Lim said.
On a less encouraging note, Lim said the prospects of the downstream segment will remain subdued on weak global demand.
Meanwhile, the midstream segment in terms of tank terminal spot rates may have bottomed out, according to him.
Affin Hwang Investment Bank Research was also “neutral” on the sector, although it has a higher Brent crude price assumption of US$88 per barrel.
Despite the uncertain fluctuation in oil prices amid the sluggish energy demand outlook from China and the United States, the research house said the current global capex upcycle is unlikely to be derailed. This is considering the severe under-investment in prior years and intensified focus on energy security.
Looking ahead into 2024, Affin Hwang sees a need to be more selective in O&G stock picks.
It favours O&G contractors and service providers, given their higher certainty on earnings, underpinned by continued industry spending, coupled with their lesser reliance on oil prices and market conditions.
“Capex spending from major oil producers is expected to remain elevated in 2024, with PETRONAS also guiding for an average of about RM60bil capex per year for the next five years,” it said in an earlier note.
Meanwhile, TA Research has an “overweight” call on the O&G sector, with a Brent price assumption of US$85 per barrel in 2024.
Its analyst Ong Tze Hern said oil prices will stay resilient on the back of production curbs from Opec+ and relatively strong demand.
Gradual recovery in petrochemical product selling prices would also be the main driver for the sector next year, Ong added.
“Given its strong economic growth and resilient industrial production, India is expected to be the main driving force for petrochemical demand in 2024.
“However, the demand growth is unlikely to bring relief to product spread in the near term, as prices are expected to remain depressed from a supply glut and new capacities coming on stream.
“China’s pivot to greater self-sufficiency in petrochemicals has led to greater supply than demand growth in recent years.
“Fortunately, prices seemed to have bottomed out and we expect prices to gradually improve in the second half of 2024 onwards,” Ong said.
