This article first appeared in The Edge Malaysia Weekly on November 18, 2024 - November 24, 2024

AMID a pickup in the award of contracts on the local oil and gas (O&G) scene, some market observers worry that volatility in global crude oil prices could heighten next year.

While geopolitical risks have always been a tailwind for oil prices, uncertainties in US-China relations following Donald Trump’s Nov 5 victory and his imminent return to the White House as 47th US president could slow demand for oil.

“Trump’s support for expanded O&G production and pledge to quickly end the Russia-Ukraine conflict is negative for the energy price outlook, with upstream players like Hibiscus Petroleum Bhd (KL:HIBISCS) and Dialog Group Bhd (KL:DIALOG) most negatively impacted,” says Maybank IB Research in a Nov 11 report.

On the other hand, MIDF Research is upbeat on Trump’s energy policy, which is supportive of fossil fuel. It points out that the movement in Brent crude prices mainly depends on the Organization of the Petroleum Exporting Countries (Opec), geopolitical tensions and global demand.

“Brent crude oil price volatility is expected to remain, with the risks of a fallout in prices to be floored by Opec+’s continuous production cuts. Meanwhile, any geopolitical friction and/or sanctions involving major oil producers could keep a ceiling on the price,” the research house tells The Edge. It estimates Brent crude to range between US$70 and US$80 a barrel moving forward.

Meanwhile, a CEO of an O&G company expects the local industry to remain robust next year as national oil company Petroliam Nasional Bhd (Petronas) has already dished out several projects at favourable rates. Nevertheless, he estimates that the sector will be in choppy waters from 2026.

“The recent developments involving Petronas and Sarawak, with Petroleum Sarawak Bhd (Petros) possibly becoming the sole gas aggregator for the state, have cast a shadow on the local O&G sector,” he tells The Edge.

He points out that the market is now anticipating the upcoming Petronas Activity Outlook 2025-2027 (POA) to provide better clarity on the sector. “So far, the POA has provided good insights into the local O&G industry in terms of the demand outlook and upcoming activities. I think the market will remain cautious on the sector for now.”

To recap, Petronas announced in March a capital expenditure (capex) allocation of between RM50 billion and RM60 billion for this year, which is part of its RM300 billion capex over the next five years. About 80% of the capex will still focus on its core hydrocarbon business.

In addition to that, the CEO of the O&G company reckons that some O&G assets from the Middle East could make their way to Asian waters, following the announcement that Saudi Arabia is slashing production.

“While it is expected that demand in the region for O&G services will remain robust, this development could impact charter rates. But we will only see the impact in 2026 onwards,” he says.

But even so, he sees the share price performance of O&G service players being influenced by crude oil prices. “It all boils down to oil prices,” he adds.

Maybank Investment Bank (Maybank IB) analyst Jeremie Yap says the impact of Saudi Arabia cutting production would mainly affect the jack-up rig segment, which could put downward pressure on regional daily charter rates (DCRs). However, the effects would take time to filter down.

“Some of the terminated assets have moved to Southeast Asia for new contracts, putting downward pressure on regional DCRs. It may take around 12 months to fully absorb this additional supply, which could limit the upward potential for charter rates in the near term,” he tells The Edge.

Brent crude was trading at US$72.07 a barrel last Friday, 12.6% lower than a year ago. J P Morgan Commodities Research forecasts that Brent crude could average at US$80 a barrel in the fourth quarter of 2024 and at US$75 a barrel in 2025, declining to as low as the US$60s by the end of next year.

Last Tuesday, Opec cut its forecast for global oil demand growth for this year and 2025, highlighting weakness in China, marking the cartel’s fourth consecutive downward revision to its 2024 outlook. The organisation cut its 2025 global demand growth estimate to 1.54 million barrels per day (bpd) from 1.64 million bpd.

Maybank IB’s Yap expects Brent crude to average at US$75 a barrel in 2025, which is in line with global estimates. “This is primarily due to a potential surplus in the global crude oil market as Opec+ begins unwinding production cuts from January 2025 over the following 24 months,” he says.

When asked about the recent weakness in the share prices of some O&G companies on Bursa Malaysia, he says there are concerns in the market that Petronas may cut its capex. “There are concerns about a slower-than-expected growth trajectory due to a potential Petronas capex cut, which may happen in 2H2024 and into 2025.”

Nonetheless, Yap reckons that the share prices of local O&G companies may still have legs. However, investors should be very selective as some of the companies could see earnings downgrades. His top picks are Yinson Holdings Bhd (KL:YINSON), Bumi Armada Bhd (KL:ARMADA), Velesto Energy Bhd (KL:VELESTO), Wasco Bhd (KL:WASCO) and Dialog.

MIDF Research forecasts that the O&G sector will continue to remain buoyant considering the long-term contractual nature of exploration and production (E&P) projects, especially with the ongoing efforts and new blocks awarded under Petronas’ production sharing contracts.

Additionally, the research house expects the development of the hydrogen sector and carbon capture projects to be new areas for the O&G sector for sustainable earnings.

“Nevertheless, the trajectory of the local O&G sector and its positive influence for local OGSE (oil and gas services and equipment) companies would depend on a few drivers, namely (i) global demand recovery, particularly in liquefied natural gas (LNG); (ii) strategic regional positioning to meet the demands of other nations and sectors (that is, industrial, consumer, utility, plantation and automotive); (iii) easing of global regulatory pressure which provides more runway for conventional fuel utilisation; and (iv) adaptation of best operational efficiency to navigate future energy transitions.

“All in all, Malaysia’s O&G sector will always have room for growth. The sector’s long-term outlook will centre on its ability to balance traditional revenue streams with a gradual transition to a more sustainable energy portfolio,” it says.

Public Investment Bank Research sees Brent crude trading between US$60 and US$80 a barrel, averaging at US$70 per barrel in 2025 on the back of support from Opec+. “However, we doubt the effectiveness of deeper cuts in sustainable support for the oil price given the shrinking market share,” it says in a Nov 15 report.

“Meanwhile, US oil production would steadily expand but the pace of growth would depend on oil prices, investors’ appetite, proposed regulations and tax incentives. Geopolitical factors continue to influence the oil price and we expect greater volatility, especially when it comes to issues involving oil producing countries like Iran and Russia.”

On the performance of local O&G companies, the research house points out that the Bursa KL Energy Index has been showing positive correlation with global crude oil prices. But the index valuation has remained depressed since 2022 despite the elevated crude oil prices and recovery in earnings. “The current bearish sentiment may sustain throughout the year 2025,” it adds.

Since the beginning of the year, almost 20 out of the 30 O&G companies on Bursa Malaysia have seen a good run in their share prices, with top performers being offshore support vessel (OSV) players. Their robust share price performance was also backed by improved earnings this year following better charter rates and higher utilisation of their vessels. 

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