• OVERWEIGHT; Top Picks: Bumi Armada, Dayang Enterprise, Yinson, Bangchak Corp and PTT Oil and Retail Business (PTTOR). We cut our average Brent crude oil price for 1Q23F to USD85/bbl (2023: USD88/bbl), but also think that it will take some time before the impact of China’s reopening of borders is felt – this may gather momentum in 2Q23-3Q23. Concerns over soft demand remain, but OPEC+ should still be a major price support. That said, we expect a more balanced oil market in the medium term, with the theoretical supply deficit estimated at 0.2mbpd in 2023.

• We lower our 2023 Brent crude oil price forecast to USD88/bbl from USD90/bbl, and maintain 2024-2025 projections at USD80/bbl. Our 1Q23 estimate drops to USD85/bbl as it will take some time before the impact of China’s border reopening is felt – it may pick up in 2Q23-3Q23. Overall global crude oil demand should remain healthy, registering positive growth of 2.2mbpd this year. Note that apart from global economic uncertainties, there is also an increased risk of a supply disruption following the commencement of the EU embargo on Russian oil and the implementation of a price cap. For now, we may see a sudden decline in crude exports, but these should eventually be re-routed to other countries as time goes by – premised on the overall global demand being largely unaffected still.

• Relatively balanced oil market in 2023. The International Energy Agency’s (IEA) December Oil Market Report highlighted that Organisation for Economic Co-operation and Development (OECD) industry oil stocks have increased by 17m bbl to 2.77bn bbl in October, or 150m bbl below its 5-year average. Preliminary data for the US, Europe and Japan show industry stocks rose by 3m bbl in November. Currently, the inventory is above 2010-2014 levels, when oil prices averaged at >USD100/bbl. Based on our assumptions, we expect a relatively balanced market in 2023, with the estimated quarterly deficit-to-surplus ranging from -0.7mbpd to +0.8mbpd. Therefore, it is reasonable to assume that oil prices may stay above USD80/bbl. Meanwhile, a weak economic outlook – or, in the worst case, a recession – would bring down global demand significantly. With OPEC’s commitment to cut production, this may somehow provide strong support for oil prices.

• Sector view. We believe oil companies will maintain capex and opex spending plans, which will benefit upstream service providers (Yinson, Dayang Enteprise and Coastal Contracts). For Malaysia, the overall expectations of upstream activities by services players remain fairly robust. Also, there could be a potential increase in rates for new contracts, to cater for the rising cost of materials. For Thailand, we like PTTOR and Bangchak Corp – both Top Picks – on the basis of their oil & retail business recovery, which in turn would be supported by their nationwide oil & retail service branches in Thailand and neighbouring countries.

Source: RHB Research - 9 Jan 2023