The Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC producers have collectively agreed to raise supply as of 1 July 2018, which deals with the unplanned supply disruptions in Venezuela, Iran, Libya and Nigeria.
OPEC agreed to raise production but will remain in its previously agreed quota of 32.5 million barrels per day. Remarks made by Iran and Iraq suggest that a supply boost of 0.7 to 0.8 million barrels per day was expected while the Saudis said that output should increase by an extra 1 million barrels per day.
The second half of the year typically sees higher demand for crude oil hence a tighter supply is expected. As a result, UOBKH believes that the market could still be undersupplied hence it helps to set a floor price of US$70 per barrel.
The stability in crude oil price could lead to oil majors raising breakeven prices when budgeting for projects next year onwards. On the flip side, oil majors are currently still eschewing long-term deepwater projects and are still more inclined towards short-medium term projects.
Separately, DBS Research opined that the lower-than-expected increase in supply will give a boost to oil price, citing targets of US$70-US$75 per barrel in 2018 and US$65-US$70 per barrel in 2019. In addition, the analyst also feels that oil & gas stocks should regain ground.
In view of the 10%-15% correction in regional oil & gas stocks, DBS Research sees chance of a recovery.
These two stocks are set to benefit from the abovementioned reasons:
UOBKH maintains market weight citing recent pullbacks in prices as a good entry level for oil price-related stocks, believing that there is a short-term rebound trade opportunity on the positive news.
Large caps stocks such as Keppel Corporation are safer proxies to the oil & gas sector backed by a stronger balance sheet.
UOBKH maintains its positive view on Keppel Corp with a “Buy” call and a target price of $9.00. DBS Research has a target price on $10.20 on this stock.
Both UOBKH and DBS Research cited recent weakness and a positive news flow for a price recovery in Sembcorp Marine.
Similarly, both research houses believe that it will take some time for the rig-builders to stage a strong recovery as oil majors are still deliberating on longer-term deep sea projects.
Meanwhile, Sembcorp Marine was ascribed a target price of $2.05 by UOBKH, suggesting a potential upside of 4.6 percent. DBS Research gave a more aggressive target price of $2.90, suggesting an upside of some 48%.