HLIB Research maintained its “neutral” call on the oil and gas sector in Malaysia.
PETALING JAYA: Crude oil prices are expected to soften towards the end of this year, as the geopolitical risk premium on the commodity dissipates.
According to Hong Leong Investment Bank Research (HLIB Research), the price of benchmark Brent crude oil should hover between US$70 and US$75 per barrel this month and next, before closing at US$70 per barrel by end-2024.
The research house estimated that Brent crude would average at US$80 per barrel for 2024. As of end-October 2024, the average price Brent crude stood at US$81 per barrel.
For 2025, HLIB Research expects Brent crude to average at US$75 per barrel.
“The geopolitical risk premium on oil prices has dissipated over the past two years as oil supplies have stayed resilient amid geopolitical instability,” the research house said.
“Barring scenarios that could materially threaten global supply, we think ‘geopolitical fatigue’ will start setting in and increasingly allow fundamentals to dictate price direction,” it added.
HLIB Research maintained its “neutral” call on the oil and gas sector in Malaysia.
In a report yesterday, it noted that Brent crude fell by 5% last Monday to around US$72 per barrel, reflecting a tempered market response to Israel’s strikes on Iran last month.
The attacks, which bypassed critical oil and nuclear sites, was milder than anticipated, reducing fears of a major escalation in Middle East tensions and potential supply disruptions of oil from Iran.
Besides the easing geopolitical risk premium, softening fundamentals in the near to mid-term would likely put a lid on oil prices, HLIB Research said.
The research house noted that in January, the Organisation of Petroleum Exporting Countries (Opec) projected 2024 global oil demand growth at 2.25 million barrels per day (mbpd) but this was subsequently trimmed to 1.93mbpd last month, due to China’s persistent demand shortfall.
On the other hand, Opec will begin unwinding its voluntary 2.2mbpd production cuts in January 2025 and gradually phasing them out through 2025.
“Overall, we take the view that most oil and gas services and equipment providers, which have displayed impressive earnings growth over the past year will likely see their earnings reaching a peak in 2024, with marginal growth in 2025, at best,” HLIB Research said.
“Although the recent share price-correction in the sector due to the PETRONAS-Petros saga might have been overdone, we advise investors to stay cautious on service contractors until further clarity emerges on the capital expenditure (capex) for offshore projects,” it added.
Nonetheless, HLIB Research said it continued to like Dayang Enterprise Holdings Bhd
, anticipating the company’s 2025 earnings to remain largely stable due to a solid pipeline of maintenance, construction and modification orders and resilient demand for offshore support vessels.
Additionally, as a Sarawak-based contractor, Dayang is also poised to be a beneficiary of Petros’ offshore capex drive, it added.
“Once the PETRONAS-Petros negotiations on distribution of gas from Saraawak are fully resolved, we expect domestic capex, including in Sarawak, to regain momentum,” the research house said.
The research house noted that although PETRONAS is rumoured to have held back some greenfield projects in Sarawak for now, Petros reportedly plans to allocate approximately RM40bil in capex over the next five years, according to its chairman, Hamid Bugo.
“For perspective, Petros’ implied annual capex of RM8bil represents about 30% of PETRONAS domestic capex of RM26bil in 2023. Therefore, any potential reductions or deferrals in PETRONAS’ capex could be mitigated by Petros’ ambitious plans for Sarawak, in the medium to longer term,” HLIB Research said.
“Should Petros launch a robust capex drive, we believe investors should take a holistic view of total domestic capex rather than focusing on PETRONAS’ activities alone,” it added.
