Oil

Oil: An increasing number of foreign brokers are highlighting that the oil market is actually better than it looks, despite crude prices sliding to six-year lows in recent days.

Both Morgan Stanley and Standard Chartered are suggesting that other measures indicate that the physical oil markets have stabilized or even strengthened.

Morgan Stanley is drawing attention to the pricing gap between monthly crude contracts and changes in relationships of regional benchmarks, which suggest that the recent oil price decline appear to be more “financial than physical”. The spread between Brent and Dubai crudes is at its narrowest in many several years, which could signal underlying strength in demand for the Middle Eastern oil.

Meanwhile, Goldman Sachs expects China to continue buying oil to refill its strategic reserve this year, citing recent data which shows that the Chinese demand for gasoline rose 17% in Jul, registering its highest growth year-to-date.

Another respite for the oil market came from the recent conclusion of Mexico’s annual hedging programme, which locked 212m barrels at 2016 prices. This represents the biggest hedge undertaken by any national government and could “remove a bearish overhang for oil”.

Maybank-KE is of the view that its measure of oil contango is at such extreme levels that typically, near term oil prices could rally.

If such a scenario materialises, the house believes that the O&M sector could rebound and that low quality names could perform relatively well in the short-term.

Overall, the house recommended strategy entails: 1) building positions in oversold, but high quality names at current depressed levels and 2) cutting exposure to those with uncertain outlook during the expected short-term bounce.

The house prefer asset-owners like Ezion (Buy: TP $1.35) with exposure to production and maintenance operations and remain negative on asset-builders such as Sembcorp Marine (Sell: TP $2.00), Nam Cheong (Sell: TP $0.17) and Vard (Sell: TP $0.35).