OPEC+ output hikes set to tip oil market towards oversupply in 2H25, says HLIB

KUALA LUMPUR: The oil demand-supply fundamentals are expected to remain unexciting in view of rising barrel production from OPEC+ in May and June, which would likely continue in the second half of 2025 (2H25).

Hong Leong Investment Bank Bhd (HLIB) expects the planned production hikes by OPEC+ to tilt the oil market towards oversupply territory in 2025.

The firm said this will be aggravated by wobbling oil demand, as US Liberation Day tariffs dampen global economic growth.

HLIB does not rule out any further oil price spike in the event of an escalation in geopolitical conflict, especially in the Middle East region.

However, judging by the fundamentals, the firm reckons that Brent oil prices may see strong resistance to sustaining above US$ 70 per bbl.

"Given their high earnings sensitivity to oil prices, companies with substantial upstream exploration and production (E&P) exposure (e.g., Hibiscus Petroleum Bhd) could see earnings contraction due to lower average realised oil prices in 2025 when compared to a high base of US$80 per bbl in 2024," it said.

On the petrochemical sector, HLIB said the sector is still in the doldrums with a prolonged downcycle perpetuated by persistent demand weakness and global petrochemicals overcapacity.

According to Bloomberg's data, polymer and aromatic prices continued to moderate in 1H25, driven by falling oil prices (lowered naphtha feedstock costs and dragging downstream average selling prices) and uncertain downstream demand amidst tariff woes since the "US Liberation Day".

"As such, we expect continued margin erosion for Petronas Chemicals Group Bhd due to narrowing spreads between its polymer products and fixed ethane gas feedstock pricing.

"The petrochemicals sector will remain in the woods in the coming years as global capacity addition will continue to outstrip demand growth, which will in turn weigh on the global utilisation rate," it said.

Overall, HLIB retained its Brent oil price forecasts for 2025/2026 at US$67 per bbl and US$70 per bbl, with the view that oil prices will continue hovering at US$60-65 per bbl in 2H25, barring escalation in geopolitical conflict.

Nonetheless, the firm reiterates its overweight rating, premised on a bottom-up view of the sector, as most of its stock recommendations are "buys".

"This is due to favourable fundamentals and earnings profiles of the respective stocks, along with undemanding valuations across the sector.

"Our top picks are Dialog Group Bhd, Dayang Enterprise Holdings Bhd and Deleum Bhd," it added.

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