This article first appeared in The Edge Malaysia Weekly on August 8, 2022 - August 14, 2022

MARKET sentiment appears to be leaning towards a bearish outlook for the oil and gas (O&G) industry as global oil prices have pulled back sharply over the past two months. A decision by the Organization of the Petroleum Exporting Countries (Opec) and its allies last week to increase oil production — even though it was by a mere 100,000 barrels a day, or the equivalent of 0.1% of global demand — was enough to spook the market further, especially as Opec had signalled in the past that it would keep supply tight.

Brent crude oil slid 4% to an almost six-month low of US$96 (RM428) per barrel. Indeed, both Brent and WTI crude are currently trading at sub-US$100 per barrel, after trading at their highest since 2009 of US$130 per barrel.

Over the past two years, oil prices have arguably been as volatile as never before. Brent oil traded as low as US$19 per barrel in 2020 and shot up to a high of US$139 this year. Such huge swings in the oil market have made investors more reactive to price movements.

This time around, oil price volatility hasn’t only hinged on demand and supply but also several other factors, including the Covid-19 pandemic, energy transition, underinvestment of new projects in the O&G industry, and the Russia-Ukraine war. At the same time, the global economy faces a peculiar scenario of sharp rise in inflation and slowing economic growth.

O&G analysts foresee oil prices trading at between US$90 and US$100 a barrel in the second half of the year.

Maybank Investment Bank Research analyst T J Liaw expects the volatility in the oil price to continue because of the energy dilemma — demand growth, supply shock and rising geopolitical risk. Overall, he projects that oil prices will continue to remain elevated at US$100 per barrel this year. “The supply side remains soft, due to structural underinvestment in the past. There is limited spare capacity by the key Opec players to ramp up output fast.

“Hence, the oil price will remain elevated over the next 24 months,” he tells The Edge.

Meanwhile, Rakuten Trade head of equity sales Vincent Lau says the increase of oil production by Opec is unlikely to have a material impact on oil prices. “The supply of oil is expected to remain tight. But, the increase in production will help to ease oil prices from a massive spike,” he adds.

Lau estimates that oil prices will range between US$90 and US$100 per barrel this year, which is a comfortable level for oil majors to increase their investments and reduce government spending on subsidies.

On Wednesday, Opec had also warned of “the severely limited availability of excess capacity”.

For years, the O&G sector had been suffering from underinvestment. However, the future of fossil fuel demand could change due to the impact of recession, climate change and the scale of energy transition globally. This has prompted many O&G majors to shy away from investing more in the industry despite posting record profits.

The unenthusiastic spending may exacerbate the oil supply crunch in the coming years.

ExxonMobil chief executive Darren Woods had predicted more investments in O&G, but pointed out it would take time for energy market volatility to end, and projected three to five years of fairly tight oil markets.

Shell CEO Ben van Beurden had also said: “With volatile energy markets and the ongoing need for action to tackle climate change, 2022 continues to present huge challenges for consumers, governments and companies alike.”

Locally, national oil company Petroliam Nasional Bhd (Petronas) said last month that it plans to double its capital expenditure (capex) to RM60 billion this year from 2021, to “catch up” with projects that were delayed due to the Covid-19 pandemic. However, the announcement has not had any tangible effect on local O&G stocks that should have been the greatest beneficiaries of the higher capex plan.

Over the past three months, the Bursa Malaysia Energy Index declined more than 23%.

Maybank’s Liaw reckons that local O&G share prices have been depressed because of the overall weakness in market sentiment. “The counters are depressed due to the top-down views on the general economy such as politics, recession risk as well as the risk of the ‘commodity run’ coming to an end.

“That said, most of the players are becoming global-centric, and are less dependent on local jobs,” he says.

MIDF Research in its recent report points out that the RM60 billion capex will reflect well on smaller companies that run construction, shipping and technical services for the core sector. “Investment in the oil and gas sector is much needed to ensure that oil and gas companies have enough funds to perform a complete, reliable energy transition for the long term, while also maintaining the efficiency and production rate of existing and new oil and gas projects.”

Despite the bearish sentiment, MIDF has “buy” calls on several O&G stocks.

It has recommended Dialog Group Bhd for its established technical and maintenance services, and Bumi Armada Bhd, for its floating production storage and offloading (FPSO) fleets.

“We like these companies for their resilience against the volatile market and supply chain interruption amid the impact of the Russia-Ukraine war, crude supply tightness and the ongoing pandemic, as well as their expansion and sustainability initiatives,” it says.

An analyst says that the lack of interest in the O&G counters on Bursa Malaysia also stems from the climate change movement and Petronas’ plans to accelerate its green energy transition ambitions.

This year’s surge in energy prices is in part the result of years of underinvestment, which means energy markets were very tight even before the spike in demand after the Covid-19 pandemic and the Russia-Ukraine war.

The way things are heading, it appears that local O&G service providers may have to pivot part of their operations and participate in the global energy transition to gain the interest of investors.

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