It is noteworthy that O&G stocks have been beaten down severely with prices down more than 70% since early March.Former investment banker Ian Yoong(pic) reckons that the O&G sector is attractive at these prices.
On Thursday afternoon, an interesting development took place that saw investors quickly rushing into oil and gas (O&G) stocks on Bursa Malaysia.
Some of these stocks shot to dizzying heights, surging more than 40% in just one day, at a time when equity markets are hemorrhaging due to the slowdown in economic growth.
For example, HIBISCUS PETROLEUM BHD and Carimin Petroleum Bhd rose by 43% on Thursday itself.
Velesto Energy Bhd rose 42% while SAPURA ENERGY BHD climbed by 46%. The fresh optimism in local O&G stocks came after crude oil prices rose more by 25% late this week.
Oil prices surged after US President Donald Trump said that Saudi Arabia and Russia may end the ongoing oil fued and cut their daily production by 10 million barrels per day, and that China was planning to buy some oil for emergency reserves.
Trump said he spoke with both Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman on Wednesday.
“I expect and hope that they will be cutting back approximately 10 million barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” Trump wrote on Twitter.
However, details of any production cut are unclear at the moment as the amount is equivalent to 10% of global supply. This would need to see both Russia and Saudi cut their current production by half.
Following the statement by Trump, Dmitry Peskov, press secretary of Russia’s President said Russia and Saudi have not started talks regarding the oil market.
“No one has started talking about any specific or abstract deals yet, ” Peskov was quoted as saying.
It is worth noting that O&G stocks were severely hit over the last four weeks, on the back of a free fall in the global crude oil price due to the coronavirus’ ripple effect globally coupled with a price war between Saudi Arabia and Russia.
These issues sent the international benchmark Brent crude oil to trade as low as US$20 per barrel and the West Texas Intermediate (WTI) price to below US$20.
That’s the lowest those prices have hit since 2002. It should be noted that even if Saudi and Russia cut their supply of oil to half as predicted by Trump, demand for oil remains weak and is expected to decline further.
According to the International Energy Agency (IEA), global oil demand could dive further by 20% or two million barrels a day from 100 million a day as there are three billion people in lockdown because of the Covid-19 pandemic.
Note that the US has recently extended its lockdown to the end of this month and India has just started.
According to OCBC Treasury Research, the oil market is facing Armageddon with the twin combinations of demand destruction and oversupply proving too much for crude oil to handle.
“It might get even worse, ” says its economist Howie Lee(pic below) in a report. He says that the V-shape economic recovery is out of sight, and expects demand destruction to continue long into the future. “The Russia-Saudi Arabia fallout may have precipitated the 9 March collapse in prices, but the real driver of bearishness now is demand.
“Recall that when the coronavirus was largely confined to China, most expected a sharp V-shape recovery in 2H 2020. That is no longer the case, ” he says.
Lee points out that the Covid-19 episode has spread too far and has lasted too long that it is now expected to have irreparable damage on incomes, consumer spending and investment plans globally.
It is noteworthy that O&G stocks have been beaten down severely with prices down more than 70% since early March.
Former investment banker Ian Yoong reckons that the O&G sector is attractive at these prices.
Among the stocks that investors should be focusing are upstream players with good management and strong balance sheets, he adds.
“The price of crude oil has hit rock bottom or is close to it. The situation is so bleak that it can only get better over the next twelve months, ” he says.
As soon as the pandemic tapers off, he expects that demand for oil will escalate and oil prices should then rise to US$40-US$50 per barrel from the current level of mid-US$20.
The recent plunge in oil prices is expected to impact US shale producers, of which, according to Yoong, about 30-40% of them will have to cease operations or file for bankruptcy.
“Whiting Petroleum Corp had filed for Chapter 11 bankruptcy recently.
“The large US shale producer is the first publicly traded casualty of crashing crude oil prices, ” he says.
“The other big plus is that we anticipate Saudi Arabia and Russia to reach a viable production agreement which will reduce supply.”
https://www.thestar.com.my/business/business-news/2020/04/04/oil-and-gas-stocks-rally-this-week
