MIDF AMANAH INVESTMENT BANK BERHAD REBOUND IN CRUDE OIL PRICE AND IMPACT TO THE MALAYSIAN ECONOMY

Transcription

1 MIDF AMANAH INVESTMENT BANK BERHAD REBOUND IN CRUDE OIL PRICE AND IMPACT TO THE MALAYSIAN ECONOMY

2 % & ' & ( ) * & +, - *. ( / + ) + & / 0 1 Malaysia has been impacted by the plunge in crude oil prices in various aspects including (i) output production; (ii) investment; (iii) employment; (iv) consumption; (v) government revenue and; (vi) currency stability. The nation s dependency on oil-related revenue has reduced since the GFC with the subsidy rationalization programme and introduction of GST. Global crude oil supply and demand meanwhile has remained on the uptrend. Currently, the global crude oil supply stands at approximately million barrels of oil per day (mbpd) versus global crude oil demand of approximately 99.4mbpd. This implies a supply surplus of around 1.1mbpd. Up to August 2017, Malaysia s crude oil production averaged thousand barrels of oil per day (kbpd), down from 670.8kbpd the same period of 2016 adhering to the agreement of reducing production supply by 20kbpd from January 2017 in line with the production cuts led by the OPEC-led countries. Crude oil price has been one of the determinants of the local bourse but currently, the movement of the KLCI seems to be disconnected from the rise in oil price due to election effect. Beneficiaries of rising crude oil prices includes both oil and gas stocks and energy transporters. 27 NOVEMBER 2017 MALAYSIA EQUITY Aaron Tan Wei Min aaron.tan@midf.com.my Adam M Rahim adam.mrahim@midf.com.my MALAYSIA ECONOMICS Team Research muhammad.zafri@midf.com.my ! " # $

3 3 Rebound in Crude Oil Price on Malaysian Economy A. Impacts of Crude oil price on Malaysian Economy Page Malaysia impacted by plunged in global crude oil prices 4 Depreciation of MYR - mainly driven by sharp drop in global crude oil prices 4 Curse of falling oil price 4 ASEAN poised to continue its upward trend 5 External trade and industrial production slides down 5 Investments exited 6 Employment in mining sector contracted by 7.8% 6 Petroleum-based economies felt the pinch 7 Expected improvements in economic activities for Oil-related revenue plunged by almost RM20b 8 B.Malaysia s Reliance on Oil & Gas Industry Petroleum sector has high value added 9 High value added observed in wage level and net exports contributions 9 Dependency on oil-related revenue reduced since GFC 10 $1 increase adds RM300m increase in revenue 10 C.Crude Oil Price Rebound Effects GDP on uptrend since mid Positive spill-over effects observed 11 Cost-push inflation to go up 12 High costs pass-through effects 12 D.Global supply and demand Supply and demand outlook 13 Top global consumers 13 Malaysia crude oil production 14 Malaysia crude oil consumption 14 E.Crude oil price on the equity market Crude oil price has been one of the determinants of the local bourse 16 Geopolitical tensions came into play 16 The FBM KLCI now moves in an opposite direction 17 What happened during GE13 17 F.Winners of crude oil price rebound Upstream E&P capex is set to increase 18 Drillers and support service providers are still scaling back spending 18 Charter rates and utilisation rates 19 Bunker prices not left out 19 Overcoming higher bunker prices 20 Money flow into winners of rising crude oil price 21 Upgrade upstream sub-segment to NEUTRAL and reiterate POSITIVE on downstream sub-segment 21 Local oil and gas stocks to benefit 21 FBM KLCI 2018 year-end target 21

4 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q November 2017 Strategy Rebound in crude oil price and impact to the Malaysian Economy 2018 Year-end target : 1,900 points A.Impacts of Crude oil price on Malaysian Economy Malaysia impacted by plunged in global crude oil prices. Prior to mid-2016, Malaysia s GDP growth has been on a declining trend amidst falling global crude oil prices. The spill-over effects of the falling global crude oil prices are through various transmission channels namely: (i) output production; (ii) investment; (iii) employment; (iv) consumption; (v) government revenue and; (vi) currency stability. GDP growth declined from 6% in 2014 to 5% and 4.2% respectively over the next two years. The fall in global crude oil prices does not only affect Malaysia, but impacts the overall global trade activities indirectly weakening global demand. During the crude oil price crisis in 2014, Malaysia as a commodity-exporting economy experienced contractionary impacts via the shrinkage in exports revenue, decline in investment receipts and decline in government revenue. Chart 1: Brent Oil Price (USD per barrel) vs GDP (YoY%) % 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% Chart 2: Brent Oil Price vs USDMYR Source: Bloomberg, MIDFR GDP (RHS) Brent Oil Price Source: Bloomberg, MIDFR Brent Oil Price USDMYR (RHS) Depreciation of MYR - mainly driven by sharp drop in global crude oil prices. Based on commonly referred Brent crude oil price benchmark, the oil price plunged from peak a of USD125.90pb in April 2011 to a low of USD35pb in January The steep decline in prices started in July 2014 due to an oversupply of crude oil, a slowdown in economic growth of emerging markets especially China and an industrial change in automotive sector from petroldriven cars towards electric-driven vehicles. Curse of falling oil price. Commodity-based and export-reliant economies such as Malaysia and Australia were heavily impacted from the decline in global crude oil prices. From 2006 to 2013, the average share of oil-related revenue was 35% to the Malaysian federal government s coffer while approximately 11.4% of Malaysia s total export products constitute petroleum-related products. Hence, among the negative impacts of falling crude oil prices are the depreciation of MYR, declining government revenue and falling export revenue. Over the period of August 2014 to January 2016, when crude oil prices fell from USD103.2pb to USD34.7pb, the MYR declined in value from MYR3.15/USD to MYR4.15/USD. It is evident that the depreciation of MYR was mainly driven by the steep decline in crude oil prices via the channels of trade and capital flows.

5 1Q10 1Q11 3Q10 3Q11 1Q11 3Q11 1Q12 1Q12 3Q12 3Q12 1Q13 1Q13 3Q13 3Q13 1Q14 1Q14 3Q16 1Q17 3Q17 1Q10 1Q11 3Q10 3Q11 1Q11 3Q11 1Q12 1Q12 3Q12 3Q12 1Q13 1Q13 3Q13 3Q13 1Q14 1Q14 3Q16 1Q17 3Q17 5 ASEAN poised to continue its upward trend. Among the ASEAN economies, Indonesia and Malaysia are the most impacted by low crude oil prices. However in general, the ASEAN currencies have been on downward trend due to the quantitative easing programme in the US which causes shifts of capital flows towards the world largest economy. Based on current patterns now, we see signs of improvements in the currencies of ASEAN economies. For instance, Thai Baht and Singapore Dollar appreciated by +2.5%qoq and +2.1%qoq respectively for the past nine months. As for the Malaysian Ringgit, the currency has been staying below RM4.30/USD since 2QFY17. We expect a reemergence of developed economies as well as developing economies in the global value chain which will indirectly contribute towards better trade activities in the region. Chart 3: ASEAN Currencies Performance (2010:100) Chart 4: Selected Commodity-Based Currencies (2010:100) Malaysia Philippines Indonesia Singapore Thailand Source: Bloomberg, MIDFR Malaysia Australia Canada Russia Source: Bloomberg, MIDFR External trade and industrial production slides down. As a consequence of the fall in crude oil prices, Malaysia s external trade activities and overall industrial production grew at tepid pace after Growth in exports from +6.7% in 2014 declined to below +2% in 2015 and This was partly due to contraction in exports of crude petroleum by -19.4%yoy and -12.9%yoy respectively for the two years. From the production side, we saw sharp deceleration in production of crude petroleum from +10.5% in 2015 to +0.8% in Nevertheless, overall IPI is not significantly impacted by the mining sector given that more than 60% of industrial production activities are located in manufacturing sector. Slowdown in global demand is a major factor for the tepid pace in IPI growth. Chart 5: External Trade Performance (YoY%) % % % -6-1 Chart 6: Industrial Productions Performance (YoY%) 1 5.0% -5.0% Exports: Crude Petroleum Exports (RHS) Exports: Petroleum Products IPI IPI: Mining IPI: Mining: Crude Petroleum (RHS)

6 Investments exited. Post-GFC 2009, gross fixed capital formation or total investment remains on suppressing trend. Total investment growth peaked at 18.9% in 2012 and dropped to 2.6% in According to Malaysia Investment Development Authority (MIDA), 18.4% of total approved investment in Malaysia was contributed by petroleum refineries products, second after E&E products. Amidst falling crude oil prices, total investment in the petroleum refineries products reduced from RM27b in 2015 to RM15.9b in Consequently, total approved investment in Malaysia declined to RM58.5b last year. Chart 7: Approved Investment by Industry (% Share During Post-GFC) Chart 8: Approved Investment (RM billion) Natural Gas Rubber Products Machinery Manufacturing Fabricated Metal Products Non Metallic Mineral Products Food Manufacturing Chemicals Products Transport Equipment Basic Metal Products Petroleum Refineries Products Electrical & Electronic Products 2.9% 3.0% 3.2% 3.2% 4.6% 5.9% 9.3% 10.7% 10.8% 18.4% 19.4% % % % Total Investment Petroleum Refineries Products Source: MIDA, MIDFR Source: MIDA, MIDFR Employment in mining sector contracted by -7.8%. Overall employment grew at a slim rate of 0.7% in 2016, dragged by the shrinking of employment in agriculture, mining and construction sectors. As for wage growth, all sectors recorded solid wage growth except for mining sector. Due to the slowdown in petroleum sector and drop in sector employment growth, slower wage growth of 1.4% was recorded for the sector in In addition, the wage growth for the mining sector continues its downtrend since peaking at a high of +41% in Tepid growth in employment and wages adds pressure on Malaysia s domestic spending after Chart 9: Employment Growth by Sector (YoY%) Chart 10: Wage Growth by Sector (YoY%) Agriculture etc. Mining Manufacturing Construction Services Agriculture etc. Mining Manufacturing Construction Services Source: MIDA, MIDFR

7 7 Petroleum-based economies felt the pinch. Economic growths in domestic petroleum-based economies such as Sarawak and Terengganu expanded by +2.3% and +3.1% in 2016 respectively. In fact, these states experienced direct impacts of the falling oil prices since 2015 as both recorded economic growth below 4% during the year. The fall in global commodity prices was among major factor for the decline in petroleum related activities in Malaysia, especially in these two states. Additionally, moderating pace of global growth impacted overall states GDP growth in 2016 in particular via exports, investment and spending channels. To some extent, we observe that there is a slight structural change in Malaysia s economy specifically by looking at GDP contribution by region. For example, among others, the drop in crude oil prices have led to lesser GDP share held by eastern region of Peninsula Malaysia from 9% in 2010 to 8.7% in Sabah and Sarawak also held lesser shares in 2016 at only 16.5% as compared to 17.7% back in Expected improvements in economic activities for Domestically, we have seen improvements in macroeconomic conditions for the past nine months. GDP growth coupled with exports, industrial production, domestic spending and optimistic business environment have been on upward trajectories since middle of 2016, in tandem with the gradual rise in crude oil prices. The improvements in economic conditions are also attributable to favourable base effects, robust global demand and receding protectionism threat. Henceforth, we expect a rebound in GDP growth for overall states in Malaysia especially for Terengganu and Sarawak moving forward. Table 1: GDP Growth by State (YoY%) Malaysia Johor Kedah Kelantan Melaka Negeri Sembilan Pahang Pulau Pinang Perak Perlis Selangor Terengganu Sabah Sarawak Kuala Lumpur Table 2: GDP Share by State & Region (%) Selangor + Kuala Lumpur Eastern Region of Peninsular Northern Region of Peninsular Southern Region of Peninsular Sabah + Sarawak

8 Oil-related revenue plunged by almost RM20b. In 2014, oil-related revenue amounted to RM62.5b. In 2015 and 2016, oil revenue declined further to RM42.7b and RM28.1b respectively. The government has anticipated low revenue collection from the oil-related channel due to sluggish oil prices. By component, we noticed revenue from petroleum tax and dividend (Petronas) dropped significantly by RM18.5b and RM13b respectively since 2014 up until With the decline in crude oil prices, the Malaysian government revenue was compensated by other sources, notably GST. Since its implementation, GST collection contributed about 16.6% of the total revenue for the government. Chart 11: Govt. Revenue: Total vs Oil-Related (RM billion) Chart 12: Components of Oil-Related Revenue (RM billion) Govt. Revenue Oil-Related Revenue (RHS) Petroleum Tax Source: MIDA, MIDFR Petroleum Royalty & Gas Dividend Petronas

9 9 B. Malaysia s Reliance on Oil & Gas Industry Petroleum sector has high value added. Based on our estimates, the upstream petroleum sector has high valueadd of up to 83.9% as compared to downstream petroleum refinery and E&E industries which only have value-adds of below 25%. This means that for every RM1 produced by crude petroleum, 84sen will flow back into the Malaysian economy whereas for the manufacturing sector, only 22sen of RM1 returns to the economy. The value adding ability from upstream petroleum sector is high as there is a low dependency on imported input and application of high capital intensive in production. High value-add observed in wage level and net exports contributions. Comparatively, wage levels in mining sector are almost always higher than the other sectors. For instance, the average monthly wage in mining is RM3,650 against overall sector RM1,703 in By looking at external trade, crude petroleum exports constitute less than 10% whereas manufactured goods constitutes about 82% of total exports. Nevertheless, mining goods is the largest supporter of Malaysia s net exports by 37.4%. Despite of small contribution in gross exports, net crude petroleum outbound shipments contribute approximately 11.8% to the total net exports. On a flip side, Malaysia is a net importer for petroleum s downstream products in particular petroleum products and chemicals & chemical product. Table 3: Percentage Share per Output (%) Imported Commodities Value Added Compensation of Employee Gross Operating Surplus Crude Oil and Natural Gas Petroleum Refinery Electrics & Electronics Distributive Trade Source: DOSM, MIDFR Table 4: Wage Level by Sector (RM per Month) Overall 1,300 1,320 1,450 1,500 1,500 1,600 1,703 Agriculture, forestry and fishing ,050 1,200 Mining and quarrying 2,500 2,200 2,300 2,340 3,300 3,600 3,650 Manufacturing 1,100 1,200 1,210 1,300 1,500 1,500 1,600 Construction 1,200 1,200 1,200 1,300 1,320 1,440 1,560 Services 1,736 1,763 1,788 1,991 2,139 2,228 2,415 Source: DOSM, MIDFR

10 Chart 13: Share of Net Exports by Goods Type (%) Chart 14: Share of Net Exports by Petroleum- Related Goods (%) Others, - 9.0% Chemicals & Chemical Products -13.5% Mining Goods, 37.4% Agriculture Goods, 34.3% Manufactur ed Goods, 37.3% Petroleum Products Petroleum condensates and other petroleum oil Crude Petroleum LNG -2.2% 1.5% 11.8% 40.1% Based on data from Jan-Sep 2017 Based on data from Jan-Sep 2017 Dependency on oil-related revenue reduced since GFC. Since the Global Financial Crisis of 2009, the government has taken efforts in reducing its dependency on oil-related revenue. Amongst others, the subsidy rationalisation programme which started in July 2010 and the introduction of GST are steps taken by the government to reduce its dependent on oil-related revenue. Moving forward, we foresee oil-related revenue share to remain below 20% even with the recovery and rebound in global crude oil prices. Oil revenue contribution could only change in a signifant way should crude oil prices breach the $100 level. $1 increase adds RM300m increase in revenue. Based on the answer given by second finance minister in parliament last year, a $1 drop in crude oil prices will cause a reduction in revenue of RM300m from the government s coffer. In the latest Budget 2018, the government s oil price assumption is USD52pb. Currently, the Brent crude oil reference price is hovering above USD60pb. Assuming that the oil price averaged USD60pb in 2018, we can expect additional government revenue by approximately RM2.4b. Chart 15: Oil-Related Revenue Share Govt. Revenue (%) 45.0% 39.1% 37.6% % 34.7% 33.9% 33.6% 35.0% 32.0% % % 1 5.0% 27.1% 22.3% 23.2% 19.2% 17.5% 17.0% 28.3% 19.5% 13.2% 12.4% Chart 16: Component Share of Oil-Related Revenue (%) % 49.9% 47.7% % 40.3% % % 9.8% 8.2% 27.1% 60.9% % Petroleum Tax Dividend Petronas Petroleum Royalty & Gas

11 1Q14 1Q14 2Q14 2Q14 4Q14 4Q14 2Q15 2Q15 4Q15 4Q15 2Q16 2Q16 3Q16 3Q16 4Q16 4Q16 1Q17 1Q17 2Q17 2Q17 3Q17 3Q17 1Q14 1Q14 2Q14 2Q14 4Q14 4Q14 2Q15 2Q15 4Q15 4Q15 2Q16 2Q16 3Q16 3Q16 4Q16 4Q16 1Q17 1Q17 2Q17 2Q17 3Q17 3Q17 11 C. Crude Oil Price Rebound Effects GDP on uptrend since mid In tandem with the modest recovery in crude oil prices, Malaysia s GDP growth expanded on an incline starting in the 3QFY16 and the growth breached >5% for three consecutive quarters in In addition, exports growth has been growing on double digit pace for ten consecutive months since December Crude petroleum exports soared up by +32%yoy for the past nine months in Besides the crude oil price recovery, improved global demand and receding protectionism threat are key factors supporting the upward trending. Chart 17: Brent Oil Price (USD per barrel) vs GDP (YoY%) % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Chart 18: Brent Oil Price vs Exports (YoY%) % % % % Source: Bloomberg, MIDFR GDP (RHS) Brent Oil Price Source: Bloomberg, MIDFR Brent Oil Price Exports (RHS) Positive spill-over effects observed. Overall industrial production and manufacturing sales indicate strong performance amid of strengthening economic growth and modest recovery in crude oil prices. Sales of refined petroleum products rose by +33%yoy for the first nine months in 2017, reaching highest ever record. However, production of crude petroleum is hampered by the agreed production limit during the meeting of OPEC and non-opec in late In the agreement, Malaysia will commit to cut oil production by 20,000 barrels per day. Chart 19: Brent Oil Price vs IPI (YoY%) % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Chart 20: Brent Oil Price vs Manufacturing Sales (YoY%) % 1 5.0% -5.0% IPI (RHS) Brent Oil Price Brent Oil Price Manufacturing Sales (RHS)

12 1Q14 2Q14 4Q14 2Q15 4Q15 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 1Q14 2Q14 4Q14 2Q15 4Q15 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 12 Cost-push inflation to go up. Malaysia s inflation is heavily dependent on crude oil prices, particularly motor gas (mogas ie. RON95 and RON97) and diesel. Slight changes in the price of retail fuel will affect transport prices and thus affecting food and non-food inflation. For instance, when the Brent crude oil benchmark price rose by +17.4%yoy to USD55.3pb in September 2017, headline inflation rose to five-months high at 4.3%. Looking ahead, we foresee strong inflation rate in the final quarter due to solid rise in prices of crude oil as well as retail fuel. Chart 21: Brent Oil Price vs Transport Inflation (YoY%) % 1 5.0% Chart 22: Brent Oil Price vs Manufacturing Sales (YoY%) 5.0% 4.0% 3.0% 2.0% 1.0% % 1 5.0% % -5.0% % -1 Brent Oil Price Growth Transport Inflation (RHS) Headline Inflation Non-Food Inflation Food Inflation Transport Inflation (RHS) Source: Bloomberg, MIDFR Source: Bloomberg, MIDFR High costs pass-through effects. The implications of rising crude oil prices are positive for the macroeconomic activity and government s income. On the other hand, rising crude oil prices add financial pressure on those belonging to the lower income group. Given that Malaysia practices the managed-float fuel price mechanism in April 2016, upward changes in the fuel price adds inflationary pressure on the lower income group s monthly household expenditure. The effect of rising crude oil prices is not only seen in retail fuel price, but has a knock-on effect on transportation costs. Table 5: Household Income Survey 2016 Median Income (RM) % Share of HH Numbers Bottom 40 Middle 40 Top 20 Bottom 40 Middle 40 Top 20 Malaysia 3,000 6,275 13, Johor 3,420 6,554 12, Kedah 2,154 4,412 9, Kelantan 1,869 3,667 8, Melaka 3,458 6,572 12, Negeri Sembilan 2,658 5,409 10, Pahang 2,722 4,648 9, Pulau Pinang 3,286 6,382 12, Perak 2,366 4,678 9, Perlis 2,572 4,751 9, Selangor 4,395 8,585 17, Terengganu 3,135 5,443 10, Sabah 2,169 4,843 10, Sarawak 2,275 4,986 10, Kuala Lumpur 5,344 10,564 20, Labuan 3,654 7,217 15, Putrajaya 5,960 9,492 21, Source: DOSM, MIDFR

13 13 D. Global Supply and Demand Supply and demand outlook. Global crude oil supply and demand remain on the uptrend. Currently, the global crude oil supply stands at approximately million barrels of oil per day (mbpd) versus global crude oil demand of approximately 99.4mbpd. This implies a supply surplus of around 1.1mbpd. Moving forward, there will still be more surplus in supply albeit at a significantly lower rate compared with that of 2014 and 2015 (surplus in excess of 2mbpd which largely contributed to the steep declines in global crude oil prices). There will also be instances of supply deficit moving forward due to strong global demand and/or deliberate decrease in supply. Up to end-2018, the U.S. Energy Information Administration (EIA) is anticipating global crude oil demand to exceed 100mbpd starting from 3Q18 onwards. Having said that however, the EIA also anticipates the growth of crude oil supply to outpace that of demand in The International Energy Agency (IEA) on the other hand anticipates an environment of supply and demand balance until 4Q18. The supply and demand balance forecasted by IEA is largely premised on OPEC maintaining their production levels until end Chart 23: Global Demand and Supply million barrels of oil per day 102 milion barrels of oil per day Implied stock change and balance (right axis) World production (left axis) World consumption (left axis) Source: International Energy Agency, MIDFR Top global consumers. In 2018, Asia Pacific region will continue to be the main source of demand. Approximately 35% of global crude oil demand will stem from Asia Pacific while 32% will come from the Americas. Strong growth will also be seen from emerging nations in Africa, albeit consumption from the continent will only constitute approximately 4.3% of global demand. In 2018, China s crude oil demand alone is expected to account for 12.8% of total global demand, rising by +2.4% from 2017 (+4.2% growth in 2017). Other Asian countries are also expected to stage strong crude oil demand growth of +4.5% in Demand from developed nations in Europe is expected to remain flat at approximately mbpd.

14 14 Malaysia crude oil production. Up to August 2017, Malaysia s crude oil production averaged thousand barrels of oil per day (kbpd), down from 670.8kbpd the same period of 2016 adhering to the agreement of reducing production supply by 20kbpd from January 2017 in line with the production cuts led by the OPEC-led countries. As the Malaysian crude oil (ie. Tapis, Labuan, Miri, Kikeh, Dulang, Bintulu) predominantly trades at the premium compared with global benchmark Brent, the selling prices since October 2017 has averaged above USD60pb. Chart 24: Malaysia Crude Oil Production thousand barrels of oil per day Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Source: Petroliam Nasional Berhad, Bank Negara Malaysia, MIDFR Malaysia crude oil consumption. Malaysia s crude oil consumption has been on a steep rise since early As at end 2016, Malaysia s crude oil consumption was at 829.2kbpd representing a consumption surplus of approximately 160kbpd. Currently, Malaysia is still a net exporter of crude oil, registering an export surplus of approximately >160kbpd from However, Malaysia has been a net importer of refined petroleum products since 2013, registering growing import surplus up to Chart 25: Malaysia Refined Petroleum Products Imports and Exports thousand barrels of oil per day Refined Products Exports Refined Products Imports

15 15 Chart 26: Malaysia Crude Oil Consumption thousand of barrels a day Chart 27: Malaysia Crude Oil Exports and Imports thousand barrels per day thousand barrels per day Export surplus (RHS) Crude oil exports (LHS) Crude oil Imports (LHS)

16 16 E. Crude Oil Price on Equity Market Chart 28: Brent Crude Oil Price Source: MIDFR, Bloomberg Crude oil price has been one of the determinants of the local bourse. News flow and sentiments have always had an influence on the movement of the Malaysia equity market crude oil price movements being of the main factors. There has been a strong relation between the FBM KLCI with the movement of crude oil prices. Referring to the 2HFY14 crude oil price slump where crude oil prices plunged from USD112pb to USD57pb, the FBM KLCI tracked the movement of crude oil price, declining from 1,885 points to 1,761 points in the same period. Meanwhile, when crude oil price was on an upbeat trend in FY16 especially in 1HFY16, the local bourse moved in the same direction, hitting a closing level of 1,728 points in mid-april, the highest in FY16. The upward trend in crude oil price during this period was mainly attributable to the slowest growth of OECD crude stockpiles since 4QFY14 coupled with IEA s expectations that global oversupply of crude oil will decline in that year. Likewise, in FY17, the local bourse also exhibited a general uptrend in the 1HFY17, which coincided with crude oil prices hovering above the USD50pb level. Geopolitical tensions came into play. In 2HFY17, the gradual pickup in crude oil prices was not emulated by the FBM KLCI. Instead, the local bourse was trading within a narrow range during the 3QFY17. We reckon that as risk-on mood on the global level at that point of time was hampered by geopolitical tensions which included a few general elections in Europe combined with the Washington-Pyongyang dispute.

17 17 Chart 29: Brent Crude Oil Price vs FBM KLCI Source: MIDFR, Bloomberg *rebased at 100 points The FBM KLCI now moves in an opposite direction. As of late, crude oil prices have been rallying until it reached a two-year high on 6 November as Middle East tensions escalated from the crackdown on corruption in Saudi Arabia. However, the local bourse reacted differently, declining to as low as 1,718 points lagging its regional peers. We attribute such movements to the anticipation of the 14 th General Election (GE14) which is expected to be held on or before August What happened during GE13. Tracing back to the 13 th General Election (GE13) in 2013, the local equity market was clearly perturbed by the impending election as evident by its stark underperformance vis-à-vis emerging ASEAN peers. Nonetheless, the local equity market reacted by staging a relief rally with the FBM KLCI at fresh record high on Monday after the election, surging +3.38% to close at 1,752 points. Thereafter, the local bourse was back on tracking crude oil price movement although there was an intermittent reversal of trend around August to September Therefore for the mean time, we note that influence of crude oil on the local bourse would be limited until uncertainties relating to the election have been dissolved.

18 18 F.Winners of crude oil price rebound Although upstream E&P capex is set to increase... Upstream oil majors consisting global integrated oils and independent exploration and production (E&P) companies are expected to increase their capital expenditure (capex) in 2018 due to multiple years of suppressed capex spend (ie and 2016). Many E&P projects, particularly those involving deep water ventures and unconventional oils have been either postponed or shelved due to unviable economics. On average, approximately 30-40% of E&P capex is allocated for drilling and completion while around 15-20% for subsea production. but drillers and support service providers are still scaling back spending. Conversely, drillers and other upstream support service providers are scaling back spending in 2017 into This, in our view is positive as: (i) there is still an oversupply situation in the offshore heavy assets realm; (ii) service providers are still in a cash conservation mode trying to optimise existing resources; (iii) service providers have rather successfully decreased operating expenses and overheads significantly and; (iv) service providers are value adding by bundling more services into their existing offerings. Chart 30: Capex by global oil majors (integrated oils and independent E&Ps) Chart 31: Capex by global drilling and support service providers USD billion USD billion F 2018F F 2018F Source: Bloomberg, Companies, MIDFR Source: Bloomberg, Companies, MIDFR

19 19 Charter rates and utilisation rates. The lower capex plan by offshore services providers can be substantiated by depressed charters rates for offshore support vessels (OSV) and drilling rigs, while the increase in capex by oil producers can be evidenced by increasing offshore activities. Offshore support vessels charter rates are still hovering near the trough as USD0.70/bhp per day, while Southeast Asia jackup rig rates are still at around USD50-55k per day. Utilisation rates (UR) however have increased significantly from a year earlier, with average OSV UR around 70% and jackup rigs in excess of 70%. Chart 32: Southeast Asia jackup rigs charter rates (USD 000 per day) Chart 33: Southeast Asia jackup rigs utilisation rates (%) thousand per day Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 % May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Source: Bloomberg, Companies, MIDFR Source: Bloomberg, Companies, MIDFR Bunker prices not left out. While the supply and demand of energy transporting vessel are not directly impacted by increasing crude oil prices, shipping companies are bound to be affected by higher marine bunker costs. We observe that the trend in crude oil price strongly corresponds to the movement of bunker price. For the past five months, the Bloomberg IFO 380 bunker price has been rising in tandem with the crude oil price, from USD321.98pmt in mid-june 2017 to USD401.48pmt as of mid-november 2017, reflecting the rise in crude oil prices. This price level translates into a premium of +14.3% on a year-to-date average.

20 30-Dec-16 9-Jan Jan Jan-17 8-Feb Feb Feb Mar Mar Mar-17 9-Apr Apr Apr-17 9-May May May-17 8-Jun Jun Jun-17 8-Jul Jul Jul-17 7-Aug Aug Aug-17 6-Sep Sep Sep-17 6-Oct Oct Oct-17 5-Nov Chart 34: Bunker price vs Brent Crude Oil Price (Rebased at 100 points) June: USD322pmt Nov: USD401pmt 75 Source:Bloomberg, MIDFR *Rebased at 100 points Bunker Rates (USD pmt) Brent Crude Oil (USDpb) Overcoming higher bunker prices. Energy transporters may be pressured by higher bunker prices as it translates to an increase in operating cost. While bunker costs make up approximately 25% of operating expenses for energy transporters such as MISC Berhad (BUY;TP: RM7.68), impacts of high bunker costs are reduced due to its optimal term to spot ratio. For instance, MISC Berhad s LNG vessels (for its LNG business) and Dynamic Positioning shuttle tankers (for its petroleum business) operate on long term charter contracts which are not subject to any bunker cost as it is borne by the charterer. Furthermore, long term charter rates especially for the LNG segment have been quite resilient and higher compared to spot charter rates for most of the time. Henceforth, we do not see the rise in bunker price to adversely impact energy transporters like MISC Berhad. Chart 35: LNG Charter Rates Chart 36: VLCC Charter Rates Source: Company, Ship Brokers Reports, MIDFR

21 21 Money flow into winners of rising crude oil price. Based on data compiled from Bloomberg, money has been flowing into a number oil and gas related stocks for the past three weeks in the wake of the rebound in crude oil prices. However there were exceptions for Petronas Chemicals and MISC. We attribute the net money outflow in Petronas Chemicals to the higher cost of working capital required following the rise in crude oil price. Investors may also be of the opinion that higher crude oil prices might affect future demand for petrochemical products, hence affecting refiners profitability. As for MISC Berhad, investors may perceive shipping companies as a whole to be affected by the higher bunker rates, ignoring MISC Berhad s strategy of having long term charter rates for its LNG and petroleum segment. Table 6: Money Flow into Oil and Gas related stocks Stock Net Money Flow (RM m) Petronas Gas Sapura Energy 1.88 Petronas Dagangan 0.74 Gas Malaysia 0.22 MISC Petronas Chemicals Source: Bloomberg, MIDFR Upgrade upstream sub-segment to NEUTRAL and reiterate POSITIVE on downstream sub-segment. Moving forward into 2018 with year-over-year expected higher crude oil price environment, expected increase in offshore E&P capex, expected increase in offshore activity levels and sustained demand for petrochemical products globally, we are upgrading our stance on the upstream sub-segment of the oil and gas industry to NEUTRAL from negative previously. We continue to reiterate our POSITIVE stance on the downstream sub-segment of the oil and gas industry. In addition, we turn more bullish on our 2018 average Brent crude oil price expectations, increasing our expectations to USD60pb from USD55pb previously. Local oil and gas stocks to benefit. For the upstream services segment, we are bullish on Sapura Energy Berhad (BUY; TP: RM1.69) as the company can expect to benefit from rising crude oil and LNG selling prices, increased shallow water and deep water activities and more active offshore heavy engineering works. For the downstream subsector of the O&G industry, we remain our bullish stance on Petronas Dagangan Berhad (BUY; TP: RM28.00), Petronas Chemicals Group Berhad (BUY; TP: RM8.18), Petronas Gas Berhad (BUY; TP: RM20.00) and Gas Malaysia Berhad (BUY; TP: RM3.50). FBM KLCI 2018 year-end target. The tightening bias especially major economies (i.e. United Sates and Eurozone) is expected to be more prevalent in 2018 against a backdrop of general improvement in macro environment. This situation is likely to exert a degree of downward presure on risk assets valuation next year. On this score, we reaffirm our FBM KLCI 2018 year-end target of 1,900 points which is equivalent PER18 of 16.7x and +0.9SD.

22 FUND FLOW REPORT! " # $ % & % % ' ' ' % ( ' ( ( & ' & & ) # % & $ % & & ) $ $ ( % & # ' $ ( * $ ( % ' ) & * & & # ( + ), - ( &, ' ' % ', ' ( & & & $ $ ( ' % & & % % ' #, % & ' %, $ $ % & & ' %. ' & % ( # & ' % ( % % ( # $ $ % ( ' % & % & ( & & $ $ % & # & & ( % / ' ' 0 ) % ' # ' & ) & &, % ' ' * 0 & & ' $ # ', ( & * $ ( * $ ' % ( (. $ ( $ ( # ( $ 1 % $. & ( * * ' ' ( $. & $ % ' ' ( ) ' % ( ' % ( ( % ', % % & $ ( $ % # NOVEMBER