O&G equities up as oil jumps on Trump's ditching of Iran nuclear deal

Singapore

MOST oil and gas (O&G)-related stocks advanced on Wednesday as oil prices shot up to the highest seen in more than three years after President Donald Trump announced the US would be pulling out of the nuclear deal with Iran and re-imposing sanctions on the country.

But analysts say Wednesday's advances could be just kneejerk reactions as the market needs more time to fully digest the impact of the US's unilateral crackdown on Iran.

The two most closely watched crude price benchmarks, Brent and WTI, rose just over 12 hours after President Trump's announcement. Brent crude surged as much as 3.1 per cent to US$77.20 in early London trading hours while WTI jumped by a similar amount to US$70.93. Singapore-listed O&G-related stocks also mostly closed in positive territory.

Joel Ng, an equity analyst with KGI, viewed Mr Trump's announcement as one of two triggers that would induce such broad-market reactions among the beleaguered O&G equity space here. The second would be a significant decline in Venezuela's output, the impact of which is likely to hit the oil market later this year.

Mr Ng suggested that these triggers are significant enough to even tilt the oil market "into deficit". He noted that such triggers tend to induce larger gains in the higher leveraged counters. He said for instance that between the two large caps, Sembcorp Marine, seen as a "pure" O&G-related play, booked a higher percentage point gain compared to Keppel Corp, which boasts a multi-business portfolio not restricted to just within the O&G industry.

But he pointed out that significant re-ratings of O&G-related stocks will come only after institutional investors return to the sector. By his projection, that is likely to happen only when Brent oil advances to the US$80s.

Market watchers generally agree that the outlook for oil prices remains hazy as the health of the oil market is subject to one too many unknowns.

For a start, President Trump's announcement has put hundreds of barrels of crude supplies at risk. US re-imposition of oil sanctions will initially impact less than 200,000 barrels per day of crude supplies and less than 500,000 barrels per day of supplies six months after from Iran, S&P Global Platts said, citing a survey conducted with analysts.

DNB Bank chief oil analyst Torbjørn Kjus noted that the sharp language Mr Trump used in delivering his speech on the Iran deal signalled that "sanctions will be tough" on those not adhering to demands of significant cuts in crude imports from Iran. This after the global refinery system just ramped up again after the September or October maintenance programme.

Still, early indications show importers of Iranian crude now waiting for more clarity on the US sanctions are not inclined to react immediately. To begin with, President Trump has granted these importers 180 days to unwind their positions on their crude purchases from Iran.

Initial responses have thus far been mixed among the largest crude importing countries in Asia.

S&P Global Platts associate editorial director, Mriganka Jaipuriyar, said that as historical allies of the US, Japan and South Korea are expected to cut Iranian crude imports, while China and India are either less likely to adhere to the sanctions or monitoring the situation before firming up their plans. Elsewhere in the world, refiners in Europe said they planned to continue importing Iranian crude for May and June loading, according to results from S&P Platts survey.

Even so, Rystad Energy's head of oil marketsBjørnar Tonhaugen suggested that any crude importers that need to "access the US financial system" would have to comply with the demands of the US sanctions on Iran.

UOB Kay Hian equity analyst Foo Zhi Wei countered however, that the international community may try to salvage the Iran nuclear deal.

He argued that even if the deal collapses entirely, the members of Organization of Petroleum Exporting Countries (Opec) can tap some 3.3 million barrels per day of spare capacity to fill any supply shortfall from Iran. Iran produced 3.8 million barrels per day of crude in April.

All eyes are therefore on Opec's next move, though Mr Tonhaugen warned that the cartel is not expected to ramp up output or exports in the near future. Opec has indicated it is keen to see oil prices move towards US$80, he explained.

But Ms Jaipuriyar of S&P Global Platts pointed out that the purpose of that agreement is to lift oil prices to a level that will bring investments back to the conventional O&G sector. She suggested that the next Opec meeting in June should provide more flavour on the metrics the cartel may turn to in order to decide on any extensions for the production cut agreement.