OPEC+ members on September 1 agreed to gradually increase supply by 400,000 barrels per day each month at a time when the resurgence of COVID-19 delta variant is still prominent globally and major U.S. refiners are offline due to Hurricane Ida in the Gulf of Mexico.
Maybank Kim Eng (Thailand) (MBKET) stated that following the announcement of the OPEC+ meeting, MBKET views that crude fundamentals are in better shape than expected and will be supportive for the Thai energy sector near-term, hence keeping a POSITIVE outlook on the sector. Top picks unchanged at PTTEP (TP: 157 baht), PTTGC (TP: 85 baht) and IVL (TP: 56 baht).
The pact aims to add 400,000 barrels per day (bpd) each month. The U.S. had a reservation on the organization to increase supply citing global recovery. Earlier on Wednesday (Sep. 1), OPEC+ revised the demand for 2022 to 4.20 million bpd which earlier was 3.28 million bpd. However, it is to question if demand and supply would meet the organization’s target level given delta variant being dominant along with low vaccination rates in the majority of the countries globally.
In MBKET’s view, OPEC+’s decision to stick to its plan of a 400k bpd hike suggests 1) it sees a tight market near-term, positive for crude prices 2) ME crude OSP to Asia is likely to continue to trend higher, pressuring refiners as crack spreads remain subdued.
As Hurricane Ida made landfall on Aug. 29 as a category 4 hurricane, estimates 2.4 million bpd of refining capacity was offline on Sep. 1. There has been limited damage to petrochemical and refining facilities, but power services have been disrupted. MBKET expects most refineries will be back online in 1-2 weeks. Lake Charles was spared power outages, a positive for IVL.
MBKET expects to see some tightness in the supply chain, but it won’t be as severe compared to Hurricane Laura (3Q20) or the Polar vortex in 1Q21. MBKET sees the following implications 1) crack spreads will marginally rise with greatest upside to gasoline if power outages last longer than expected (SPRC with 30% gasoline is key beneficiary), 2)force majeure (FM) so far has been limited to OxyChem and Westlake that produce caustic soda/PVC. During Hurricane Laura, FM was concentrated in the olefin chain (ethylene, propylene, PE, PP) leading to a 20% rise in prices. MBKET sees limited benefit to petrochemical stocks under the coverage this time.