Oil Prices Soaring on Tight Supply
Industry analysts point to the tight supply as the primary driver behind the rising crude oil prices. The voluntary production cuts from major oil producers like Saudi Arabia and Russia (part of the OPEC+ alliance) have been a key factor. OPEC+ decided to extend production cuts of 1 million barrels per day and 0.3 million barrels per day until the end of this year, citing concerns about the low oil output expected in 2024.
In addition to production cuts, global geopolitical tensions have impacted oil prices. The ongoing Russia-Ukraine conflict, which began in early 2022 and shows no signs of resolution, and a new conflict between Israel and the Palestinian group Hamas, have heightened concerns about oil supplies. While Israel and Palestine aren't major oil-producing nations, the geographic proximity of these conflicts to oil-rich regions has indirectly contributed to a rebound in oil prices.
Brent crude oil prices have surged by approximately 30% from their June lows, reaching $96.5 per barrel by the end of September. The question now is whether oil prices can sustain levels above $90 per barrel. Analysts at MB Securities Company (MBS) believe that the global crude oil supply between 2023 and 2024 is expected to remain tight due to proactive cuts by OPEC+. Furthermore, robust demand, driven primarily by China, is anticipated to bridge the gap between global oil supply and demand. China's growth in crude oil demand plays a significant role in the global oil market. Additionally, various economic and geopolitical factors may keep oil prices elevated. As such, MBS predicts that Brent crude oil prices will average $93 per barrel in the fourth quarter and hit $92 per barrel in 2024.
Stocks Moving in Tandem with Oil Prices
For an extended period, domestic oil and gas industry stocks have shown a strong correlation with fluctuations in global crude oil prices. Generally, high oil prices can boost the business activities of oil and gas companies, benefiting from increased incentives for upstream operations and higher prices for oil transportation, gas sales, and crack spreads (the price difference between a barrel of crude oil and its refined products).
With the optimism around rising Brent oil prices, along with positive news regarding the Block B - O Mon project chain, MBS anticipates a promising outlook for oil and gas industry stocks in 2024. They predict the average oil price in 2023 could reach $84.1 per barrel, up from the previous scenario of $83 per barrel, and in 2024, it could reach $92 per barrel, compared to the prior estimate of $86 per barrel.
However, MBS is developing alternative oil price scenarios to adjust their business projections for companies in the oil and gas sector, including those directly and indirectly affected by crude oil price fluctuations, such as semi-finished product prices, shipping rates, rig rental costs, and crack spreads of refined oil products on the international market.
The Future of Oil and Gas Stocks
In a recent report, ACB Securities Company (ACBS) noted that the impact of high oil prices on oil and gas businesses varies by company. Upstream service providers are poised to benefit the most if oil prices remain high over an extended period. Conversely, midstream and downstream businesses are more sensitive to short-term changes in oil prices.
A case in point is the Binh Son Refining and Petrochemical Joint Stock Company (BSR), which is expected to post strong results in the fourth quarter due to growing demand for jet fuel and high crack spreads for gasoline and diesel products in Asia. Additionally, the postponement of maintenance on the Dung Quat Oil Refinery until early 2024 is expected to further bolster BSR's results. However, rising crude oil prices may lead to increased production costs for BSR, potentially impacting its gross profit margin if oil product prices are not adjusted promptly. Consequently, BSR's after-tax profit in 2023 and 2024 is expected to decline by 50% and 10%, respectively, due to refinery maintenance.
Companies that directly benefit from high oil prices, such as Petroleum Technical Services Joint Stock Corporation (PVS) and Petroleum Drilling and Drilling Services Corporation (PVD), have yet to achieve expected results due to delays of 6-12 months in their oil and gas exploration contracts. For instance, PVD typically signs oil and gas contracts 6-12 months in advance. While awaiting the upside of rising oil prices, PVD faces significant pressure from fluctuations in exchange rates because the majority of the company's loans are in USD.
By the end of the second quarter, PVD's loan balance approached nearly $152 million (equivalent to VND 3,560 billion). Although the majority of the loans are long-term (over 80%), PVD still grapples with significant cash flow challenges. ACBS estimates that loan revaluations will negatively impact PVD's income statement. Therefore, a 1% increase in the US dollar compared to the Vietnamese dong will result in a loss of approximately VND 35 billion due to exchange rate changes.
In summary, while the future of oil and gas stocks appears promising due to soaring oil prices, the performance of individual companies in the sector can vary based on factors such as their position in the supply chain and financial strategies to navigate price fluctuations. Investors should remain cautious and consider these nuances when evaluating investment opportunities in the oil and gas industry.
