Raise crude oil price estimate to USD100/ bbl
Crude oil price (dated Brent) surpassed USD100/bbl (since 2014) in Feb 2022 and reached a high of USD124/ bbl recently to average USD93/bbl YTD. The energy market currently faces an energy ‘tri-lemma’: (i) strong global oil demand post-pandemic, (ii) supply disruption due to structural underinvestment and (iii) rising geo-political tension (Russia-Ukraine crisis). A potential sanction on Russia will see the oil crisis take a turn for the worse, with heightened volatility over an extended period. For this,
we raise our in-house crude oil price estimate (dated Brent) to USD100/bbl for 2022 (vs. USD75-80/bbl previously). Our key BUYs are Hibiscus, Yinson, Dialog, Pet Chem and Solarvest.
A tight oil market is fuel to higher energy price
Global oil demand is strengthening. OPEC/ EIA/ IEA are projecting higher global consumption levels in 2022 (+3.7m bpd/ +3.5m bpd/ +2.6m bpd) as global economies progressively recover post-pandemic. Consumption will likely surpass pre-Covid levels (100.3m bpd in 2019) in 2H22 as the tourism, aviation sectors pick up.
However, the increasing hunger for energy is not equally reciprocated, due to supply disruptions. The market will remain under-supplied over an extended period (2-3 years) due to prolonged under- investment. Global E&P capex has been on a steady decline since 2014 due to long-term demand uncertainty, tighter access to financing and greater push for ESG considerations. While O&G investment will pick up in 2022, the overall value represents just half of its peak (USD800+b) in 2014.
Also, the OECD stocks are at alarmingly low levels, having trended down since Aug 2020 and are currently below the 2015-19 average (2,800m bbls). Spare capacity is also depleting and OPEC+ continues to fall behind its quota (700k bpd shortfall in Jan 2022) and will continue to struggle to keep pace with its monthly quota hikes (400k bpd). US shale production is not ramping up fast enough in this cycle and is not a short-term solution to higher productivity. The capex/ output is more disciplined this round, as
access to financing is restrained and will be constrained by ESG considerations. In summary, the global oil demand-supply dynamics will remain imbalanced.
Volatility to remain high; the Russia conundrum
The rising geopolitical landscape (Russia-Ukraine crisis) will exacerbate the situation further. This will see oil price at higher and volatile levels. A sanction (hard/ medium/ soft) on Russia will have an adverse implication to the oil market. Russia accounts for 10+% of the global oil supply. That said, the coordinated SPR release (60m bpd) by USA and its allies and the very likelihood of US-Iran nuclear agreement would ease the upside in the short-term (i.e. Iran to add additional output). That is not a long-term solution to the market. The latter (Iran) is a sentiment booster for the short term and is not the answer to the demand-supply mismatch. It will likely face difficulty to provide additional output due to the severe underinvestment from sanctions in the past.