Crude awakening 

ESCALATING tensions between the United States and Iran have pushed oil prices to about US$75 per barrel at the time of writing.

The rebound comes after a period of decline, with Brent crude hovering near US$65 earlier.

This spike has lifted some of the pessimism surrounding the sector, following weaker earnings in the first quarter of financial year 2025 (1Q25) and subsequent downgrades by several research firms.

Consequently, local oil and gas (O&G) stocks have seen renewed buying interest given their low valuations.  

Other positives include the recent tariff de-escalation between the United States and China although there remains uncertainty over where tariff rates will settle and their impact – key factors in the global macroeconomic forecasts, including oil consumption.

The United States consumer inflation data for May also came in softer than expected, offering some relief to markets concerned about price pressures from tariffs and broader cost pass-throughs.

Another factor is that the Organisation of the Petroleum Exporting Countries and its allies (Opec+) may not increase actual oil volumes by as much as they’re stating on paper. This suggests that oil prices may hold steady in the near term.

Recall that one of the factors casting a shadow over the global oil industry is also the recent policy shift to ramp up production by Opec+ where the alliance was said to be prepared to allow oil prices to ease into the US$55 to US$60 per barrel range in a bid to introduce uncertainty into the investment plans of rival producers.

Even so, analysts caution that volatility remains as recent price gains may prove temporary in the face of broader market uncertainties. After all, Brent crude averaged US$79.86 per barrel in 2024, down from US$82.49 in 2023, underscoring the shifting economic and geopolitical dynamics.

JP Morgan projects Brent crude will trade in the low-to-mid US$60s in 2025 despite a sharp escalation in geopolitical tensions involving Iran, the United States and potentially Israel.

The bank sees oil averaging US$60 in 2026 but flags US$120 to US$130 per barrel as a potential range in the event of worst-case outcomes. 

Where the economy is concerned, the World Bank this week predicts global economic growth will fall to 2.3% – marking the weakest year since the 2008 financial crisis.

Sluggish growth typically translates into softer industrial activity and transportation demand, both of which are key drivers of oil consumption.

Locally, the ongoing dispute between Petroliam Nasional Bhd (PETRONAS) and Petroleum Sarawak Bhd (Petros) over control of natural gas distribution in the state is adding a layer of uncertainty with potential implications for production and investments. The national oil company announced last week that it is cutting about 10% of its workforce in a restructuring exercise.

While many agree that the era of easy oil profits is behind, seasoned players contend that volatility is nothing new.

Sharing Uzma Bhd’s perspective, its group chief executive officer Datuk Kamarul Redzuan Muhamed says the group has operated successfully across multiple downturns over the last 25 years, including the 2014 to 2016 crash and the 2020 Covid-19 demand shock, when oil briefly plunged below zero in the futures market.

Uzma provides integrated reservoir services to upstream players.

“Our planning does not rely on a single oil price figure. However, many of our projects remain viable even in the US$45 to US$55 per barrel range due to their service-based, cost-optimising nature.

“We focus heavily on brownfield assets, where production continuity is essential regardless of market cycles. Our key services (such as hydraulic workover units, coiled tubing, e-line, production enhancement and well integrity) are mission-critical for sustaining output and asset performance.,” Kamarul tells StarBiz 7.

He adds that brownfield spending accounts for over 70% of global upstream capital expenditure – a proportion that typically rises in bearish oil markets.

This is because operators tend to defer high-cost greenfield developments, but must maintain output from existing wells to sustain cash flow. Uzma, he notes, has a strong presence in South-East Asia and a growing footprint in the Middle East where producers are increasing output even as prices remain soft.

Uzma has also diversificated into renewables and technology, but not as a knee-jerk reaction to oil prices but part of a long-term strategy to balance cyclicality in oil markets and open up recurring revenue streams, adds Kamarul.

“Our New Energy division focused on solar, energy efficiency, and green power partnerships, has grown its revenue nearly 15 times in the first three quarters of financial year 2025 (FY25) compared to the full year in FY24.

“Similarly, the Digital Earth division is rapidly scaling following the launch of UzmaSat-1 in January, which is Malaysia’s first privately funded remote sensing satellite.”

Kenneth Pereira, founding managing director of Hibiscus Petroleum Bhd, echoes this sentiment, emphasising that maintaining operational efficiency and driving value creation are now more critical than merely focusing on production volumes.

He says the homegrown pure-play exploration and production company has built a portfolio around assets with low operating costs and robust fiscal terms.

“We typically model our business around a conservative price range of US$60 to US$65 per barrel, and our operations remain viable even at the lower end of that range, providing a healthy buffer during downturns.”

Pereira sees some upside to oil prices depending on how trade talks progress between the United States and China.

However, the survival of industry players will largely depend on their balance sheet strength. Lowly-geared companies are better positioned to weather a downturn. Those with multi-year, fixed-price contracts enjoy more stability.

Those operating modern, fuel-efficient assets can benefit from lower unit operating costs, while operators of modern, fuel-efficient assets benefit from lower unit operating costs, says Danny Wong, chief executive officer of Areca Capital Sdn Bhd.

Touching on the 2025 outlook, Wong says it suggests a year-on-year earnings decline following the dismal 1Q25 and an exceptionally strong performance in 2024.

“Activity levels are expected to moderate in line with PETRONAS’ Activity Outlook 2025–2027, which signals a general reduction in upstream drilling activities.

However, maintenance-related work remains resilient, as it falls under operating expenditure and is typically less sensitive to oil price cycles,” he adds.

Going by Rystad Energy estimates, the all-in corporate cash flow breakeven for many US oil producers is around US$62.5 per barrel based on West Texas Intermediate – the US crude oil benchmark.

“Given these breakeven thresholds, a Brent price of about US$60 per barrel may serve as a reasonable base-case scenario, representing the level at which many global producers can remain marginally profitable.

“In a worst-case scenario, if prices fall significantly below this level, the financial viability of higher-cost producers could come under pressure, potentially triggering further consolidation or production cutbacks across the industry,” Wong says.

He notes early signs of consolidation and merger and acquisition interest although no major deals have been announced in the local market thus far.

Some O&G players are exploring diversification into renewables, but the shift remains measured rather than aggressive.

“Earnings sustainability and project internal rate of return continue to take precedence, as many renewable ventures remain in early stages or offer lower returns than core operations.

“Additionally, the political landscape, particularly in the United States has shifted under Trump, whose policies are less supportive of green energy.

This has contributed to a softening environmental, social and governance momentum as some initiatives are now seen as politically misaligned or less economically compelling.” Wong points out.