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Asian oil & petrochemicals
Crude price hike: Gains and Pains
Event
The Macquarie oil economist Jan Stuart has raised FY11-13E WTI crude
price estimates by 6-21% and the long-term estimate by 6% to US$ 90/bbl on
the back of bullish economic data, especially from developed economies
which are rebounding.
Impact
Ahead of consensus global demand growth estimate of 2.4% for CY11:
Our oil economist is well ahead of consensus with his demand growth
forecast. Jan’s granular view on global emerging markets forecasts a modest
OECD demand recovery, pegging our global demand growth projection at
2.4% or 2.1 mbpd. Asia is expected to grow faster, at 3.3% since…..
Asia houses 3 of the world’s top 4 oil guzzlers: China, Japan and India are
the #2, #3 and #4 in global oil consumption, and while Japan’s demand for oil
is declining, it is much more than offset by the growth engines of the other
two. Overall, Asia (ex-Middle East/Russia) consumes 30% of the world’s oil,
and its thirst is growing at a 5-year historical CAGR of 1.4%.
High Asian import bill to increase further: Asia (ex-Middle East/Russia)
imports 71% of its crude requirements. Hence, an increase in crude prices
affects these countries to the extent of increasing their import bill significantly.
Subsidies complicate the issue in China and India, where the increase in
crude prices is not passed on to consumers totally, thus distorting the
demand-supply dynamics of the market as well as creating an artificial
subsidy pool which the government and crude producing public-sector units
need to fill up. High oil prices and very large corresponding subsidies had
driven-up Indian diesel demand growth by 26% during 2QCY08. However,
since China’s upstream regulator NDRC has indicated that it shall pass on
prices to consumers in the band of US$ 80-130/bbl, it is primarily India which
faces the brunt of increased subsidies.
Outlook
Inpex, Japex, CNOOC, Cairn India, PetroChina prime beneficiaries: Pureplay
upstream stocks Cairn India, CNOOC and Inpex see large upgrades to
earnings and target prices due to their direct linkage to crude prices.
Petrochina, too, despite being an integrated player, is affected positively by
the change in oil price, due to the upstream segment contributing 81% of its
EBIT. However, our recommendation on all the stocks has been maintained.
Top sector picks remain PetroChina, Reliance Industries and GAIL While
they are beneficiaries of higher crude prices; they are based on fundamentals,
rather than entirely cyclical reasons. PetroChina and RIL are best plays on the
upstream growth in China and India, respectively, while RIL also gains
significantly from the cyclical upturn providing a boost to refining margins of its
high-complexity integrated refinery. The gas juggernaut for China and India is
resulting in large investments in development of transmission infrastructure,
and we believe Indian oligopolistic major GAIL and PetroChina (which is also
building most of China’s pipeline network) are best poised to take advantage
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