Mounting downside risks expected for O&G sector
PETALING JAYA: The oil and gas sector is expected to face growing headwinds in the coming months, driven by geopolitical tensions, trade policy uncertainties and a shift in the production strategy of the Organisation of the Petroleum Exporting Countries and its allies (Opec+), according to MIDF Research.
The research house downgraded its stance on the sector to “neutral”, citing mounting downside risks and a challenging investment environment.
“All in all, we downgrade our cautious optimism to a ‘neutral’ stance on the sector moving forward, largely due to two major downsides, namely, US President Donald Trump’s trade tariffs that may disrupt supply chain in the oil and gas sector, and increased Opec+ output,” MIDF Research explained.
The research house highlighted that Opec+’s latest move to raise output by 411,000 barrels per day in May 2025 – equivalent to three months of planned increases – formed part of a “flexibility strategy” to navigate market volatility and energy security concerns.
However, the additional supply is anticipated to weigh on prices.
“Oil prices are set to decline below US$65 per barrel,” MIDF Research stated.
“This will continue to drag Brent crude oil prices below US$70 per barrel, further adding risk to new upstream projects in terms of production volume and its feasibility,” it added.
The research house now expects Brent crude to average around US$67 per barrel in April 2025, within a broader range of US$63 to US$70.
This revision factored in stabilisation of prices but also rising project costs due to US-imposed tariffs, which are estimated to add 2% to 5% to projects involving American parties.
MIDF Research noted, however, that Malaysia would be relatively insulated from direct tariff impacts.
“The impact of the tariffs to our local front is minimal and only limited to raw material prices, such as steel and aluminium, and other feedstock and chemicals for petroleum products,” it said.
Upstream activities remained surprisingly resilient, with local players continuing exploration and production efforts, it added.
Noting that the upstream segment was defying the oil price downtrend, MIDF Research pointed out that on the local local front, Petroliam Nasional Bhd (PETRONAS) is expected to intensify efforts to shift oil production to gas production, in tandem with the rising demand for liquefied natural gas (LNG).
MIDF Research said upstream momentum remained evident from the Malaysia Bid Round 2025 and growing interest in deepwater projects, which are expected to increase from 30 in 2024 to 35 to 40 in 2025.
It also saw opportunities for oil and gas services and equipment companies given their long-term contracts with upstream clients.
For the midstream segment, LNG continued to outperform, supported by robust demand in Asia, coal-to-gas switching and energy security concerns.
“Global LNG prices continued to surge in March 2025 by 51% year-on-year,” it pointed out.
PETRONAS’ announcement to build a new regasification terminal in Lumut by 2028 underscored Malaysia’s commitment to LNG expansion.
According to MIDF Research, there are potential gains in storage infrastructure amid lower oil prices.
“Storage farms are also expected to gain momentum following the lower Brent crude oil price, allowing refiners and traders to hedge against price rebounds or supply disruptions.”
On the downstream side, retail fuel remained stable while recovery in petrochemicals will stay elusive.
MIDF Research expected refinery margins to stay steady due to energy transition efforts, but warned that petrochemical recovery may be delayed until year-end due to oversupply and low polymer prices.
Despite the mixed outlook, MIDF Research chose PETRONAS Gas Bhd (PetGas) as its top pick for the sector, with a target price of RM18.67.
“We favour PetGas for its diversified portfolio in the natural gas distribution subsector; strong LNG position; and higher domestic and regional focus, which can reduce the direct exposure from the United States-China trade war,” it said.