Oil & Gas Sector : Uncertain and volatile crude dynamics NEUTRAL

SECTOR FOCUS OF THE DAY

Oil & Gas Sector : Uncertain and volatile crude dynamics               NEUTRAL

The good run in oil prices in 2016 may lose some steam in 2017 with the persistence of supply-demand imbalances amid uncertainties stemming from the likely recovery in US shale production, potential policy changes from an incoming Trump administration and European Union’s deteriorating political cohesiveness driven by Brexit against the backdrop of growing right-wing sentiments and an immigration crisis. We maintain our oil price projection of an average of US$45-US$50 per barrel in 2017 compared to US$43 per barrel in 2016. Both investors and oil companies are now hoping for another big rally in 2017. More so with both OPEC and non-OPEC agreements among countries to reduce oil production, an attempt to address global oversupply.  The OPEC meeting in late November saw oil price jump more than 12% in just one week afterwards and rode its momentum to hit new highs in December. Concern remains as to whether the OPEC agreement that brought so much joy to oil prices will continue. Imbalances between supply and demand remains.

Higher price sustainability is key to sector upgrade. We may upgrade the sector if the visibility improves for a faster pace of upstream capex rollouts, which ultimately hinges on the sustainability of crude oil prices at the higher levels. In our view, the catalysts would be: 1) a stronger global economy to drive increased oil consumption; 2) Compliance to OPEC quotas by its members; 3) deteriorating geopolitical tensions in the Middle-East and West Africa; and 4) growth constraints to US crude oil production, which is currently 10% below the all-time peak of 9.6mil barrels in March 2015. Maintain Neutral stance with BUY calls for Dialog Group, Yinson and SapuraKencana Petroleum. Our HOLD calls are for MISC, Bumi Armada and UMW Oil & Gas while Petronas Gas is a SELL due to the upcoming implementation of the incentive-based regulatory tariff setting mechanism.

Others :

Plantation Sector : Improved profits to support valuations            NEUTRAL

ECONOMIC HIGHLIGHTS

Singapore : Foresee moderate growth in 2017

Indonesia : Expect a stable growth in 2017

NEWS HIGHLIGHTS

Retail Sector : The Store shareholders given more time to accept buyout offer

Property Sector : JAG to diversify into property development

Consumer Sector : Boardroom tussle emerges at EKA Noodles