BIMB Securities Research maintained its “overweight” rating on the oil and gas sector.
PETALING JAYA: The weakness in oil prices is due mainly to the potential inventory buildup in the oil market and the expected interest rate cut by the US Federal Reserve (Fed).
According to BIMB Securities Research, the potential buildup is in line with the International Energy Agency’s (IEA) expectation for a surplus of 860,000 barrels per day (bpd) in 2025, while the expected US interest rate cut may indicate a slowdown in the economy and weaker oil demand.
The research house lowered its 2024 average Brent forecast to US$80 per barrel from US$85 per barrel.
It projected 2025 average Brent at US$75 per barrel, taking into account strong supply from non-Organisation of the Petroleum Exporting Countries (Opec) and weaker demand outlook.
Brent crude prices are currently hovering below US$70 per barrel.
Nevertheless, BIMB Securities Research maintained its “overweight” rating on the oil and gas sector together with MISC Bhd
, Hibiscus Petroleum Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) and Velesto Energy Bhd.
BIMB Securities Research said the weakness in Brent crude oil prices was due to weak China demand and strong non-Opec supply.
It noted that China’s year-to-date oil import for the seven months of 2024 had slipped 2.5% year-on-year (y-o-y) to 317.84 million tonnes, a stark contrast to the 11% y-o-y growth in 2023.
“We understand that Chinese petrochemical producers are cutting their operating rate amid a weak product margin environment and this could have led to lower oil demand,” it said.
“The IEA anticipated that there will be a surplus in oil inventories in 2025 by 860,000 bpd even if Opec+ maintains its production cut.
“This is driven by stronger non-Opec production that is expected to grow by 1.5 million bpd in both 2024 and 2025.
“This will outpace the projected demand growth of less than one million bpd in 2024 and 2025,” it added
BIMB Securities Research also observed that oil prices tended to be under selling pressure during the US Federal Fund rate (FFR) cut cycle, as evident in 2001 and 2007.
“Hence, upside to oil price may be limited in near term and it may only start to rise again when the FFR stabilised,” the research house explained.
“We are not overly concerned about the potential downside to oil prices as we see physical market condition remaining stable with both inventories at Organisation for Economic Co-operation and Development countries and the United States remaining below five-year average,” it added.
On its top picks, BIMB Securities Research said despite lower oil price, MISC would unlikely be heavily affected as its offshore and liquefied natural gas segments are on fixed long-term charter contracts.
It said both segments made up 60% to 70% of its profit estimate for the company.
While Hibiscus might be affected by lower oil price, the research house said the group’s acquisition of TotalEnergies Brunei asset could offset the impact.
The acquisition is expected to be completed by the fourth quarter of 2024.
Meanwhile, MMHE and Velesto had secured an order book of RM6.3bil and RM1.3bil, respectively, which would offer earnings visibility in the near term despite the unfavourable movement in oil price, it added.
