Hibiscs. Target price of 3.40 Malaysian Ringgit.
$HIBISCS (5199.BMS)$ (Kuala Lumpur news on the 11th) With the continuous decline in international oil prices, Brent crude oil fell below $70 per barrel yesterday, entering a bear market. Analysts believe that the supply of non-OPEC countries is strong, especially weak demand in the Chinese market, and the limited upward potential for oil prices. They have lowered their oil price forecasts for this year.
Global benchmark Brent crude oil fell below $70 on Tuesday, reaching its lowest level since December 2021. Compared to its high point in April this year, Brent crude oil has now fallen by more than 22%, officially entering a bear market.
Both BIMB Research and Fenglong Research have lowered their average price forecasts for Brent crude oil in 2024 from $85 per barrel to $80, and the forecast for 2025 has also been lowered to $75.
BIMB Research analysts pointed out in their report that the price of Brent crude oil recently fell to $70 per barrel due to weak demand in China.
In the first seven months of this year, China's oil imports decreased by 2.5% compared to an 11% growth rate in 2023. China's petroleum producers have reduced production rates due to low profit margins.
In addition, the International Energy Agency (IEA) predicts that even if the Organization of the Petroleum Exporting Countries and its allies (OPEC+) maintain production cuts, the excess oil stock in 2025 will reach 0.86 million barrels per day.
The Energy Agency also predicts that in 2024 and 2025, the daily oil production of non-OPEC countries will increase by 1.5 million barrels, while demand growth is estimated to be less than 1 million barrels.
Meanwhile, Fenglong Research pointed out in the report that limited upside potential for oil prices is expected due to several reasons, and the oil market may remain sluggish in the fourth quarter of this year.
Analysts explained that the existing voluntary production cut plan of 2.2 million barrels per day by the 8 OPEC+ member countries will be phased out from October and gradually discontinued until September 2025.
"Although there are reports that OPEC+ may postpone production increases due to recent oil price weakness, we remain cautious, as this remains a key downside risk in the upstream sector."
Furthermore, analysts pointed out that with dim economic prospects, market participants see global oil demand growth falling below expectations, especially with a decline in China's demand, leading to an estimated sustained period of low oil consumption in the short term.
Given the increasing downside risk in oil prices, Fenglong Research has lowered its two-year crude oil price forecast.
US interest rate cuts.
Oil prices will face selling pressure.
BIMB pointed out that historical trends indicate that during the rate cut cycles of the Federal Reserve in the United States, oil prices will face selling pressure, with a correlation as high as 0.75 in 2001, higher than 0.1 in 2008.
From the current economic situation in China, the trend of oil prices may follow the model of 2001.
However, analysts believe that the physical market conditions remain stable, with inventories in the Organisation for Economic Co-operation and Development (OECD) and the United States below the 5-year average level, providing some support for oil prices.
According to news, in June 2024, the OECD petroleum inventories were 2.824 billion barrels, a decrease of 21 million barrels from May. It is expected that summer demand will further reduce inventories.
Meanwhile, as of September 8th, U.S. inventories were 0.418 billion barrels, approaching the lowest level in the past 5 years of 0.416 billion barrels.
Further production cuts stabilize oil prices.
BIMB believes that the decision of the OPEC+ alliance on oil prices is still crucial. Due to unfavorable market conditions, the organization has actually postponed the "cancellation of production cut plans", in other words, still cutting production, counterbalancing the increased output of non-OPEC countries, which is expected to stabilize oil prices.
"Oil Alliance + original plan, from the fourth quarter of this year to the third quarter of 2025, the voluntary supply will be reduced to a maximum of 2.2 million barrels per day. However, it is now expected that the daily supply for December will only increase by 0.18 million barrels."
Non-OPEC supply is strong, while on the other hand, OPEC+ is committed to achieving supply-demand balance. Therefore, analysts believe that further production cuts are possible.
Analysts added that Saudi Arabia has the ability to reduce production to control prices. During the pandemic, the region reduced production to 7.5 million barrels per day, lower than the current 9 million barrels per day.
"Therefore, OPEC+ can still offset the impact of non-OPEC production increases and stabilize oil prices."
The Malaysian energy index fell 3.9% at one point.
Limited upside for oil and gas stocks.
Dragged down by the sharp drop in international oil prices, the Malaysian energy index fell to 826.06 at one point today, a decline of 33.55 points or 3.9%. It continued to drop 24.43 points or 2.84% at the close, ending at 835.18 points, making it the largest percentage drop among the indexes.
Despite the bearish outlook for oil prices, analysts are optimistic about the localOil & gas industryMixed reviews. Based on the advantages of individual companies, BIMB still recommends 'shareholding' in the oil & gas industry. On the other hand, Fenglong Research sees that the profitability of oil & gas companies may peak this year, and has downgraded the industry rating from 'shareholding' to 'neutral'.
Fenglong Research believes that in the past year, some oil & gas companies with significant profit growth may reach a peak in profitability, and at most only achieve single-digit growth by 2025.
Oil & gas stocks are declining
"As a result, the upside potential for oil & gas stocks is temporarily limited. Coupled with the market's concerns about the weak outlook for oil prices and the increasingly worrying possibility of reduced capital expenditure by the national oil company (Petronas), we believe the buying momentum for oil & gas stocks will weaken further."
Fenglong Research's top picks are Dialog Group (DIALOG,7277, main board energy sector) and Velesto Energy (VELESTO,5243, main board energy sector), with target prices of RM3.04 and 35 cents respectively.
Analysts expect that Dialog Group's profits will continue to grow over the next few quarters, benefiting from the expiration of its traditional engineering, procurement, construction and commissioning (EPCC) contracts, as well as the upcoming expansion of the middle oil tank terminal at Bintulu's Deepwater Port (PDT3).
As for Velesto Energy, Fenglong Research believes that its stock price has recently fallen excessively. Despite the postponement of greenfield exploration by national oil, the downward risk of its fleet utilization is limited. With a P/E ratio of 8 times, analysts see this as a buying opportunity.
However, the bank has removed ARMADA (5210, main board energy group) from the list of preferred stocks, and has downgraded its rating from "buy" to "hold".
On the other hand, BIMB's preferred international shipping (MISC, 3816, main board transportation logistics group), Hibiscus Petroleum (HIBISCS, 5199, main board energy group), Malaysia Marine and Heavy Engineering (MHB, 5186, main board energy group), and VELESTO Energy have target prices of 10.30 ringgit, 3.40 ringgit, 0.94 ringgit, and 0.34 ringgit respectively.
The bank explains that the stability of international shipping is attributed to long-term charter contracts in the offshore and liquefied natural gas sectors, accounting for 60 to 70% of its expected profits.
Hibiscus Petroleum may offset the impact of falling oil prices by acquiring TotalEnergies' assets in Brunei, with this activity expected to be completed in the fourth quarter.
In addition, analysts pointed out that Malaysia Marine and Heavy Engineering and VELESTO Energy have substantial orders of 6.3 billion and 1.3 billion ringgit respectively, providing visibility for near-term earnings.
Global benchmark Brent crude oil fell below $70 on Tuesday, reaching its lowest level since December 2021. Compared to its high point in April this year, Brent crude oil has now fallen by more than 22%, officially entering a bear market.
Both BIMB Research and Fenglong Research have lowered their average price forecasts for Brent crude oil in 2024 from $85 per barrel to $80, and the forecast for 2025 has also been lowered to $75.
BIMB Research analysts pointed out in their report that the price of Brent crude oil recently fell to $70 per barrel due to weak demand in China.
In the first seven months of this year, China's oil imports decreased by 2.5% compared to an 11% growth rate in 2023. China's petroleum producers have reduced production rates due to low profit margins.
In addition, the International Energy Agency (IEA) predicts that even if the Organization of the Petroleum Exporting Countries and its allies (OPEC+) maintain production cuts, the excess oil stock in 2025 will reach 0.86 million barrels per day.
The Energy Agency also predicts that in 2024 and 2025, the daily oil production of non-OPEC countries will increase by 1.5 million barrels, while demand growth is estimated to be less than 1 million barrels.
Meanwhile, Fenglong Research pointed out in the report that limited upside potential for oil prices is expected due to several reasons, and the oil market may remain sluggish in the fourth quarter of this year.
Analysts explained that the existing voluntary production cut plan of 2.2 million barrels per day by the 8 OPEC+ member countries will be phased out from October and gradually discontinued until September 2025.
"Although there are reports that OPEC+ may postpone production increases due to recent oil price weakness, we remain cautious, as this remains a key downside risk in the upstream sector."
Furthermore, analysts pointed out that with dim economic prospects, market participants see global oil demand growth falling below expectations, especially with a decline in China's demand, leading to an estimated sustained period of low oil consumption in the short term.
Given the increasing downside risk in oil prices, Fenglong Research has lowered its two-year crude oil price forecast.
US interest rate cuts.
Oil prices will face selling pressure.
BIMB pointed out that historical trends indicate that during the rate cut cycles of the Federal Reserve in the United States, oil prices will face selling pressure, with a correlation as high as 0.75 in 2001, higher than 0.1 in 2008.
From the current economic situation in China, the trend of oil prices may follow the model of 2001.
However, analysts believe that the physical market conditions remain stable, with inventories in the Organisation for Economic Co-operation and Development (OECD) and the United States below the 5-year average level, providing some support for oil prices.
According to news, in June 2024, the OECD petroleum inventories were 2.824 billion barrels, a decrease of 21 million barrels from May. It is expected that summer demand will further reduce inventories.
Meanwhile, as of September 8th, U.S. inventories were 0.418 billion barrels, approaching the lowest level in the past 5 years of 0.416 billion barrels.
Further production cuts stabilize oil prices.
BIMB believes that the decision of the OPEC+ alliance on oil prices is still crucial. Due to unfavorable market conditions, the organization has actually postponed the "cancellation of production cut plans", in other words, still cutting production, counterbalancing the increased output of non-OPEC countries, which is expected to stabilize oil prices.
"Oil Alliance + original plan, from the fourth quarter of this year to the third quarter of 2025, the voluntary supply will be reduced to a maximum of 2.2 million barrels per day. However, it is now expected that the daily supply for December will only increase by 0.18 million barrels."
Non-OPEC supply is strong, while on the other hand, OPEC+ is committed to achieving supply-demand balance. Therefore, analysts believe that further production cuts are possible.
Analysts added that Saudi Arabia has the ability to reduce production to control prices. During the pandemic, the region reduced production to 7.5 million barrels per day, lower than the current 9 million barrels per day.
"Therefore, OPEC+ can still offset the impact of non-OPEC production increases and stabilize oil prices."
The Malaysian energy index fell 3.9% at one point.
Limited upside for oil and gas stocks.
Dragged down by the sharp drop in international oil prices, the Malaysian energy index fell to 826.06 at one point today, a decline of 33.55 points or 3.9%. It continued to drop 24.43 points or 2.84% at the close, ending at 835.18 points, making it the largest percentage drop among the indexes.
Despite the bearish outlook for oil prices, analysts are optimistic about the localOil & gas industryMixed reviews. Based on the advantages of individual companies, BIMB still recommends 'shareholding' in the oil & gas industry. On the other hand, Fenglong Research sees that the profitability of oil & gas companies may peak this year, and has downgraded the industry rating from 'shareholding' to 'neutral'.
Fenglong Research believes that in the past year, some oil & gas companies with significant profit growth may reach a peak in profitability, and at most only achieve single-digit growth by 2025.
Oil & gas stocks are declining
"As a result, the upside potential for oil & gas stocks is temporarily limited. Coupled with the market's concerns about the weak outlook for oil prices and the increasingly worrying possibility of reduced capital expenditure by the national oil company (Petronas), we believe the buying momentum for oil & gas stocks will weaken further."
Fenglong Research's top picks are Dialog Group (DIALOG,7277, main board energy sector) and Velesto Energy (VELESTO,5243, main board energy sector), with target prices of RM3.04 and 35 cents respectively.
Analysts expect that Dialog Group's profits will continue to grow over the next few quarters, benefiting from the expiration of its traditional engineering, procurement, construction and commissioning (EPCC) contracts, as well as the upcoming expansion of the middle oil tank terminal at Bintulu's Deepwater Port (PDT3).
As for Velesto Energy, Fenglong Research believes that its stock price has recently fallen excessively. Despite the postponement of greenfield exploration by national oil, the downward risk of its fleet utilization is limited. With a P/E ratio of 8 times, analysts see this as a buying opportunity.
However, the bank has removed ARMADA (5210, main board energy group) from the list of preferred stocks, and has downgraded its rating from "buy" to "hold".
On the other hand, BIMB's preferred international shipping (MISC, 3816, main board transportation logistics group), Hibiscus Petroleum (HIBISCS, 5199, main board energy group), Malaysia Marine and Heavy Engineering (MHB, 5186, main board energy group), and VELESTO Energy have target prices of 10.30 ringgit, 3.40 ringgit, 0.94 ringgit, and 0.34 ringgit respectively.
The bank explains that the stability of international shipping is attributed to long-term charter contracts in the offshore and liquefied natural gas sectors, accounting for 60 to 70% of its expected profits.
Hibiscus Petroleum may offset the impact of falling oil prices by acquiring TotalEnergies' assets in Brunei, with this activity expected to be completed in the fourth quarter.
In addition, analysts pointed out that Malaysia Marine and Heavy Engineering and VELESTO Energy have substantial orders of 6.3 billion and 1.3 billion ringgit respectively, providing visibility for near-term earnings.
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