O&G stocks see gains as oil prices hit eight-month high

This article first appeared in The Edge Financial Daily, on June 8, 2016.

KUALA LUMPUR: Oil prices, which hit their highest in eight months yesterday, pushed up the share prices of several local oil and gas (O&G)-related stocks, while the FBM KLCI benchmark index gained 11.63 points or 0.71% as the ringgit strengthened to 4.0557 against the US dollar, supported by diminishing expectations of a near-term US interest rate hike.

At press time, Brent crude on the London-based ICE Futures Europe Exchange was trading at US$51.14 (RM207.63) per barrel, up 1.17%, after peaking at US$51.30 earlier in the day, its highest since October.

Meanwhile, the West Texas Intermediate on the New York Mercantile Exchange grew 1.05% to US$50.21, after having touched a fresh 2016 peak at US$50.37, also its highest since October last year.

Reuters said the rise was buoyed by the US dollar nearing one-month lows and by falling Nigerian oil output after a spate of attacks on infrastructure.

Although analysts are sceptical that the share price rally of the O&G counters could be sustained, there are pockets of optimism considering that prices continue to inch up as supply outages in not only Africa, but also Canada continue to boost fear of supply shortages.

The rise in oil prices was further stimulated by projections of falling US crude inventories by an estimated 3.5 million barrels last week, a third consecutive weekly drop, said Public Investment Bank Bhd analyst Mabel Tan.

Tan thinks the oil price recovery could be sustained, considering the supply shortages from affected production in various countries.

“However, we still see the presence of downward pressures on oil prices that could easily break this trend,” she was quick to add.

Tan added that oil prices have at least a trickling effect on various sectors whether the impact is in a direct or indirect way.

“Oil is still a main source of fuel for many companies. A more positive oil sentiment thus would boost the overall morale of the market,” she told The Edge Financial Daily via email.

Nevertheless, Public Investment Bank maintains its “neutral” outlook for the sector for the interim, as it anticipates continued pressures on oil prices considering supplies that are expected to flood the market again.

“Our average Brent oil price levels are predicted at US$44 per barrel for 2016, US$50 per barrel in 2017, and US$60 per barrel at the end of 2017,” she added.

MIDF Research does not think the rally is sustainable as it contends that the current oil price recovery is due to more than just the supply and demand play, like the US dollar and US Federal Reserve rates.

“As much as crude oil prices indicate the state of supply and demand for hydrocarbon, key decisions made by Organization of the Petroleum Exporting Countries (Opec) and major non-Opec countries, and even the financial health of a particular country, affect the general overall sentiment of investors,” the research house pointed out.

Meanwhile, local O&G stocks with larger market capitalisation have been seen registering significant price hikes since last Friday.

Petronas Dagangan Bhd and Petronas Gas Bhd both rose 0.8%, while Malaysia’s largest O&G service provider by market capitalisation, SapuraKencana Petroleum Bhd, gained 1.8%.

Petronas Chemicals Group Bhd rose 2.5%, while Malaysia Marine and Heavy Engineering Holdings Bhd gained 3.5%. Bumi Armada Bhd went up 5.2%.

MIDF said the gains in the stocks were mainly supported by crude oil prices, which were trending upwards, supported by a narrowing global supply glut, more robust crude oil demand from China and India, and overall optimism that global crude oil prices might have “bottomed out”.