Lately, I have been searching for a company which has good profit margins, a business model which is non-conventional (i.e., not manufacturing, banking, plantation, and trading in nature), and resilient to external market shocks. I hope I have found the right company! This week I will be looking at Cypark Resources Berhad (5184). Cypark is a company that is involved with the provision of environmental solutions. It has 4 main business segments which are: 1. Environmental engineering: Provision of nature conservation and environmental improvement services. 2. Landscaping and infrastructure: Provision of landscape services, project management services, and infrastructure development. 3. Maintenance: Provision of specialist maintenance works on leachate treatment plants, landscape services for parks, and maintenance of public amenities. 4. Green technology & renewable energy: Solar panel, biogas, biomass, waste-to-energy, and other renewable energy project...
Rising oil price is positive for oil and gas counters. Based on the chart of West Texas International (WTI), the worst seems to be over for oil. But will this bullish environment last?
Based on the price chart of West Texas International below, it seems that prices have convincingly breached the $60 level.
Chart 1: West Texas International Chart as of May 4, 2018
Demand
According to OPEC’s April 2018 estimates, daily world oil demand has been on the increasing trend; growing from 97.07 million barrels per day (mb/d) in 2017 to 98.7 mb/d in 2018. Besides, oil demand is expected to exceed the historical threshold of 100 mb/d in the fourth quarter of 2018.
Based on the above OPEC statistics, the increase in the demand for oil in 2018 of 1.63 mb/d is due to increase in demand from China of 0.42 mb/d, US of 0.23 mb/d, India of 0.20 mb/d, and Africa of 0.14 mb/d, refer to Table 1 below on Oil Demand in 2018. The demand for oil in other regions was relatively unchanged for the same year. The general increase in the demand for oil was due to higher demand for diesel, petrol and jet fuel in the transportation segment, and liquefied petroleum gas (LPG) in the petrochemical segment.
Table 1: World Oil Demand in 2018, million barrels per day
Table 2 below shows that world oil demand has been increasing from 2014 to 2016. However, supply outstripped demand during this period; thus, the plunge in oil prices in 2015. In 2017, oil prices seem to be on a recovery track.
Table 2: Annual Demand vs Supply
Source: OPEC
OPEC manages its production to roughly about 32% of global oil supply would be more than happy to let prices rise. OPEC‘s oil production averaged 32.4 mb/d in 2017 and has decreased to about 32 mb/d in March 2018. This strategy to curtail oil production has been working so far as oil prices have already risen to about $70 per barrel.
Rig counts
The increase in oil rigs is a strong indicator of improvement in the oil and gas industry. Particularly in the US, according to the rig count published on Baker Hughes' website, the rig count as of May 2018 stands at 1,032 rigs, which is an increase of 155 rigs or 18% compared to a year ago. Global growth, however, was not as exciting as the US as it only added 29 rigs, refer to Table 3 below. The improvement of oil prices is certainly aiding the US oil industry. The US seems to be the biggest beneficiary from the improvement in oil prices.
Table 3: Rig Counts
Source: Baker Hughes
Iran Oil Deal
In a few days, the US administration under Trump will decide whether to withdraw from the six party nuclear agreement, and it may decide to impose sanctions on Iran's oil industry. If that is the case, this would slash the supply of Iranian oil by about 250,000 to 350,000 barrels per day. Consequently, this will drive oil prices up due to the decrease in supply.
Final Thoughts
Oil prices are at an important juncture. The demand for oil has been steadily increasing, specifically from China, US, India, and Africa. On the supply side, OPEC and Russia have been cooperating to tighten oil supply. Therefore, the likelihood of oil prices trending up is higher in the near future.
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Based on the price chart of West Texas International below, it seems that prices have convincingly breached the $60 level.
Chart 1: West Texas International Chart as of May 4, 2018
Demand
According to OPEC’s April 2018 estimates, daily world oil demand has been on the increasing trend; growing from 97.07 million barrels per day (mb/d) in 2017 to 98.7 mb/d in 2018. Besides, oil demand is expected to exceed the historical threshold of 100 mb/d in the fourth quarter of 2018.
Based on the above OPEC statistics, the increase in the demand for oil in 2018 of 1.63 mb/d is due to increase in demand from China of 0.42 mb/d, US of 0.23 mb/d, India of 0.20 mb/d, and Africa of 0.14 mb/d, refer to Table 1 below on Oil Demand in 2018. The demand for oil in other regions was relatively unchanged for the same year. The general increase in the demand for oil was due to higher demand for diesel, petrol and jet fuel in the transportation segment, and liquefied petroleum gas (LPG) in the petrochemical segment.
Table 1: World Oil Demand in 2018, million barrels per day
Table 2 below shows that world oil demand has been increasing from 2014 to 2016. However, supply outstripped demand during this period; thus, the plunge in oil prices in 2015. In 2017, oil prices seem to be on a recovery track.
Table 2: Annual Demand vs Supply
Source: OPEC
OPEC manages its production to roughly about 32% of global oil supply would be more than happy to let prices rise. OPEC‘s oil production averaged 32.4 mb/d in 2017 and has decreased to about 32 mb/d in March 2018. This strategy to curtail oil production has been working so far as oil prices have already risen to about $70 per barrel.
Rig counts
The increase in oil rigs is a strong indicator of improvement in the oil and gas industry. Particularly in the US, according to the rig count published on Baker Hughes' website, the rig count as of May 2018 stands at 1,032 rigs, which is an increase of 155 rigs or 18% compared to a year ago. Global growth, however, was not as exciting as the US as it only added 29 rigs, refer to Table 3 below. The improvement of oil prices is certainly aiding the US oil industry. The US seems to be the biggest beneficiary from the improvement in oil prices.
Table 3: Rig Counts
Source: Baker Hughes
Iran Oil Deal
In a few days, the US administration under Trump will decide whether to withdraw from the six party nuclear agreement, and it may decide to impose sanctions on Iran's oil industry. If that is the case, this would slash the supply of Iranian oil by about 250,000 to 350,000 barrels per day. Consequently, this will drive oil prices up due to the decrease in supply.
Final Thoughts
Oil prices are at an important juncture. The demand for oil has been steadily increasing, specifically from China, US, India, and Africa. On the supply side, OPEC and Russia have been cooperating to tighten oil supply. Therefore, the likelihood of oil prices trending up is higher in the near future.
If you like my posts and this blog please SUBSCRIBE in the link above or follow me on Google+ !!! THANKS
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