Neutral

Oil prices jumped more than 5% yesterday, to their highest levels in more than a week before settling down -1.04% at closing for Brent on news that some of the world’s largest oil producers met in Doha to tackle the deep supply glut. There is hope that oil prices could be stabilized, as oil ministers and ministers of energy from Saudi Arabia, Venezuela, Qatar and Russia have agreed to curb (not an outright cut) oil output at January levels, contingent that major producers followed suit. According to Saudi Arabia’s oil minister, the decision to “freeze” production is the “beginning of a process” that they will assess in the coming months to decide if they need other measures to stabilize and improve the market. Their aim is to meet the rising demand thus a stable price is needed.

• Oil prices to stabilize? The market remains speculative, illustrated by the fall in oil prices from its initial rally during the day prior to the oil news announcement yesterday. Bearish news from global markets however continues to dampen oil prices. China’s slowing economy and US’ shale producers potential to ramp up production on rising oil prices could continue to pressure the commodity.
• Iran’s comeback saw the loading of its first cargo of oil to Europe last weekend since the lifting of its sanctions mid-January. They also plan to increase output as much as 1mbbls/day within 6 months to regain lost market share, more aggressively than our estimates of additional c.500,000bbls/day by end-2016 in phases as Iran upgrades its infrastructure which was reportedly experiencing leaking pipelines upon testing towards end of last year. At this juncture we are still uncertain of the country’s ability to ramp up production so rapidly, however there have been supply deals with various international oil majors which could be the game changer.
• Malaysia. Following Petronas’ announcement last month of RM50bn capex cuts in the next 4 years, an internal town hall meeting is expected early March to address the NOC’s initiatives to address the reduction in OPEX, among other issues. The oil price dip has placed the O&G players in a “reboot and restart” scenario, whereby cost of entry is lower, financing of assets can be done at cheaper rates while rate cuts are being undertaken across the board, thereby giving able players opportunities to benefit when the industry recovers again. From our understanding, the NOC does aim to continue stimulating production and therefore has no plans to cut production.
• OPEC. January crude production levels according to IEA increased by 280,000bbls/day to avg. 32.6mbbls/day as Saudi Arabia, Iraq and Iran pumped more oil. Qatar is said to lead the monitoring of the output “freeze” agreement.
• Uncertainties on the output “freeze” Agreement. The freeze on January production levels is not an outright cut, and which is also dependent on all OPEC members agreeing on the plan. The deal however has fallen short of market’s expectations, shown in the closing performance of oil prices yesterday. The question is whether the implementation of this agreement can even be met? It is still unclear whether all parties will sign on, and whether Iran would agree to cap its production, after successfully removing its sanctions. Iran has intentions to grab its market share, thus its plans to ramp up production by 500,000 to 1mbbls/day might pose as a major hurdle. Assuming Iran does comply with the deal, the production freeze may not necessarily ease the glut.
   
• US shale to slow. The EIA’s latest Drilling Productivity Report, saw a loss of another 92,000bbls/day in shale oil production in March. Losses are mainly from Eagle Ford (decline of 50,000bbls/day output), and decreasing natural gas production (-451m cf).

Source: PublicInvest Research - 17 Feb 2016