Production cuts and geopolitical risks to keep oil price in US$80-US$90 a barrel range

KUALA LUMPUR: Hong Leong Investment Bank (HLIB Research) expects oil price to remain elevated between US$80 and US$90 per barrel in the medium term due to continued production cuts by oil producing countries and heightened geoplitical risks, among others.

The research firm maintains an overweight call on the sector as it believes there will be continued production cuts from Organisation of the Petroleum Exporting Countries (OPEC) at least until mid-2024; heightened geopolitical risk premium due to potential escalation of the Israel-Hamas conflict in the Middle East; limited capacity growth as with US shale oil output growth slowing, and impending restocking activities of the US strategic petroleum reserve.

Its top picks in the sector include Bumi Armada Bhd (BUY; target price (TP): RM0.69), Hibiscus Petroleum Bhd (BUY; TP: RM3.22) and Wasco Bhd (BUY; TP: RM1.27).

After rounds of output cuts, OPEC's total crude production has declined to 27 thousand barrels per day (mbpd) in July this year from 29mbpd in October 2022, partially negating Iran's increase of 0.4 mbpd during the same period.

"Although widening spare capacity of 5.0 mbpd from OPEC+ may amplify downside risk, we reckon the cartel is in no rush to loosen its taps as soft economic outlook may hurt demand, higher-for-longer interest rate limits upside for prices, and stronger oil prices to lift oil and gas revenues for Saudi Arabia and Russia going forward," it said in a note.

It also said alleged involvement of Iran in the conflict might result to interventions by the United States.

Furthermore, given Iran's proximity to the Strait of Hormuz – one of the most important oil chokepoints – Tehran could disrupt oil flowing through the Persian Gulf.

"Nonetheless, we do not foresee immediate supply risk from the region so long as the conflict is contained to Israel and the Gaza Strip.

The US crude output hit record high of 13.05 mbpd in August 2023, mainly contributed by increasing shale oil production at an all-time high level of 9.8 mbpd. However, the firm believes US oil production growth will reach its ceiling in a few years, as the Permian Basin is likely to fall into decline because much of the most productive acreage has been drilled, oil majors vowing to limit capex spending on fracking, and a significant declining rate of existing shale oil wells that follow through.

Its Brent Crude oil forecasts for 2023/2024/2025 is US$85/85/80 per barrel (from US$85/80/75).

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