China, the second-largest oil consuming country in the world, expected to see a GDP decline to 6.3% (2015F: 6.8%), and as a result, we expect global petroleum and other liquid fuels to grow by just 1.4 million b/d in 2016 and 2017, flat compared with 2015’s level, in line with the estimate of the Energy Information Administration (EIA).

This is despite expected economic recoveries in several oil-consuming countries, including the US. For OECD, 2016 oil demand is expected to increase 0.3 million b/d, while for non-OECD countries, oil demand is expected increase to 1.1 million b/d in both 2016 and 2017 (2015F: 0.8 million b/d), helped by growth in the Middle East and Eurasia.

The EIA expects OECD inventory to continue to rise in 2016 to 3.13 billion barrels, with the largest builds in 1H16. In 2015, inventories rose by an estimated 1.9 million bbl, and as of 1st January 2016 stand at 482.3 million bbl. For OPEC, the EIA estimates 2016 production to increase 0.5 million b/d, with Iran accounting for most of the increase (+0.3 million b/d). In 2016, non-OPEC production is expected to drop for the first time since 2008, with US output falling to 8.7 million b/d (2015F: 9.4 million b/d). On investment, 2016 global oil and gas investment is expected to fall to $522 billion USD, down 12% y-y and 28% from 2014’s levels, adversely affecting oil output on less exploration activity.

Bahana’s economists believe that low oil prices should also reduce prospects for other commodities. Our sector analysts expect current low oil prices would have varied repercussions across industries (exhibit 1). In banking, credits of about 133 trillion IDR have been distributed to oil and gas companies, which could result in higher non-performing loans.

Our sensitivity analysis suggests that for every 10% reduction in global oil prices, Indonesia’s GDP growth would drop by 10bps. Note also that our studies reveal the need for the Indonesian government to issue 532 trillion IDR of bonds to help offset lower revenues.

At this stage of the market cycle, we lower our average end-2016 oil price assumption to $30 USD/bbl from $55 USD/bbl and our 2017 assumption to $50 USD/bbl. Lingering uncertainties in the oil market include the pace and volumes of Iranian oil entering the market, the strength of oil-consumption growth, OPEC’s strategy and non-OPEC’s responses to prices. Note that Iran is reportedly able to produce oil at $1-1.5 USD/bbl.

On the heels of our lower oil-price assumptions, we downgrade our sector call to UNDERWEIGHT (from NEUTRAL). Risks to our sector call are higher-than-expected oil demand on faster-than-expected global economic recoveries.

Exhibit 1. Lower Oil Price - Impact by Industry

 

Source: Bahana