We are bullish on oil price due to (i) floor on oil price supported by voluntary supply cut; (ii) resilient demand outlook that outstrips supply; (iii) SPR inventory restocking. We raise our 2023 oil price forecast to USD83.5/bbl and introduce our 2024 oil price forecast at USD85/bbl. On the back of expected strength in oil price, we upgrade the sector to Overweight. Upstream service providers such as VELESTO, PANTECH, and MHB are well positioned to leverage on the higher capital expenditure into upstream exploration and production activities.

Floor on Oil Price Supported by Voluntary Supply Cut

Recap that OPEC+ announced 2.0mn barrels per day (bbl/day) of output cuts from November 2022, and an additional 1.66mn bbl/day of voluntary cuts from nine OPEC+ countries from May 2023 (including 0.5mn bbl/day from Russia alone) (Figure 1 and 2). These output cuts will be effective until the end of 2024. On top of that, Saudi Arabia voluntarily reduced its crude oil production by 1.0mn bbl/day from July 2023.

On 5 September 2023, Saudi Arabia and Russia have extended their voluntary supply cut by 1.3mn bbl/day through to the end of December 2023 in a move to boost energy prices. Saudi Arabia will continue to trim 1mn bbl/day of output while Russia would reduce production by 0.3mn bbl/day. However, the Saudis have left open the possibility of increases, saying there would be monthly reviews to consider deepening the cut or increasing production, in a statement carried by the Saudi Press Agency.

Despite oil production cut by OPEC, USA has ramped up crude oil production over the past few months. EIA Drilling Productivity Report shows that the drilled but uncompleted wells (DUC) in the USA have declined since peaking in June 2020 despite newly drilled wells consistently staying above 900 (Figure 4). This suggests that new wells continue to be drilled but the completion of wells are accelerated to capitalise on the strong oil prices. In fact, USA crude oil production has increased by 276k bbl/day in June 2023 compared with the start of the year (Figure 3). In contrast, the latest OPEC production in August 2023 is down 1.3mn bbl/day compared with January this year (Figure 1). As more and more DUCs are brought online, crude oil production in the USA is expected to continue climbing. Nonetheless, we do not expect the increase in USA oil production to completely fill the void left by OPEC nations. The voluntary production cut to maintain oil prices on top of the broader OPEC supply cut puts a strong floor to the oil prices.

Demand Resilient and Expected to Outstrip Supply

The global demand outlook is expected to remain resilient. USA has started refilling its strategic petroleum reserves (SPR) in June 2023, but the inventories remain low following the massive drawdowns previously (Figure 5). USA’s strong economy data provides hope for a soft landing. Meanwhile, China’s demand remains weak but is expected to pick up with the recent reserve requirement ratio cut to stimulate the economy and refiners increasing imports to capitalise on the strengthening export margins and higher export quotas (Figure 6).

Bullish on Oil Price

We are bullish on oil price due to (i) floor on oil price driven by voluntary supply cut; (ii) resilient demand outlook that outstrips supply; (iii) SPR inventory restocking. YTD, Brent crude oil averaged USD81.3/bbl. We raise our 2023 oil price forecast to USD83.5/bbl (previous: USD82.5/bbl) and introduce our 2024 oil price forecast of USD85/bbl.

Source: TA Research - 19 Sept 2023