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Asia: Energy: Oil - Refining
Equity Research
Demand-rationing oil prices to cause concerns for the refining cycle
Higher oil prices likely to be bad for the refining cycle and margins
While oil prices and refining margins are widely viewed as correlated, we
note that this is only true over the longer term and there could be extended
periods when they, in fact, move in opposite directions (refer to Exhibit 1).
While both are driven by long term oil demand growth, we find that
differences in the supply side situation of oil and refining sectors can lead
to extended distortions in the oil price-refining margin correlation. This is
particularly true when demand outlook is less robust, either owing to
economic weakness, oil supply bottlenecks or during refining oversupply.
With low OPEC oil spare capacity cushion from the disruption in Libya, we
believe oil demand has to grow in line with the non-OPEC supply available.
While this will likely keep oil prices near the demand-rationing zone of
US$130+/bbl over 2012E-13E, lower demand implies lower refinery
utilisation rates. Hence, we believe we are likely moving into another
period of low correlation between oil price and refining margins.
Lower oil demand implies 2012E peak for refining cycle; Asian deregulated refiners sell 20%-30% of volumes in developed markets
We expect the refining cycle to peak in 2012E owing to weaker 2013E demand.
While we see emerging markets demand remaining robust, the global refinery
utilisation rates would likely be impacted by our lower OECD demand
forecasts. We also estimate that the de-regulated Asian refiners sell about
20%-30% of their refining volumes in the developed markets.
1Q11 indicates temporary earnings peak for most Asian refiners
While 2011E quarterly utilisation rates are likely to be steady to nudging up
in coming quarters, we note 1Q11 likely indicates a temporary peak of
Asian refiners’ earnings from strong inventory gains and light-heavy oil
price differential. Moreover, the YoY earnings growth momentum will start
slowing down after Sep’11 quarter despite distillate cracks finding support
from likely Chinese imports as domestic market remains tight, in our view.
Prefer SK Innovation and HPCL (CL-Buy), IOC, Sinopec; Sell Thai Oil
We like SK Innovation owing to its exposure to upstream E&P amid higher
oil price outlook in 2012E and moderate refining margin leverage. We like
the regulated refiners HPCL (Conviction Buy) and IOC, Sinopec (both Buy)
owing to their defensive nature. We retain Sell rating on Thai Oil. Weak
demand and project delays remain key risks to our margin forecasts
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asia: Energy: Oil - Refining
Equity Research
Demand-rationing oil prices to cause concerns for the refining cycle
Higher oil prices likely to be bad for the refining cycle and margins
While oil prices and refining margins are widely viewed as correlated, we
note that this is only true over the longer term and there could be extended
periods when they, in fact, move in opposite directions (refer to Exhibit 1).
While both are driven by long term oil demand growth, we find that
differences in the supply side situation of oil and refining sectors can lead
to extended distortions in the oil price-refining margin correlation. This is
particularly true when demand outlook is less robust, either owing to
economic weakness, oil supply bottlenecks or during refining oversupply.
With low OPEC oil spare capacity cushion from the disruption in Libya, we
believe oil demand has to grow in line with the non-OPEC supply available.
While this will likely keep oil prices near the demand-rationing zone of
US$130+/bbl over 2012E-13E, lower demand implies lower refinery
utilisation rates. Hence, we believe we are likely moving into another
period of low correlation between oil price and refining margins.
Lower oil demand implies 2012E peak for refining cycle; Asian deregulated refiners sell 20%-30% of volumes in developed markets
We expect the refining cycle to peak in 2012E owing to weaker 2013E demand.
While we see emerging markets demand remaining robust, the global refinery
utilisation rates would likely be impacted by our lower OECD demand
forecasts. We also estimate that the de-regulated Asian refiners sell about
20%-30% of their refining volumes in the developed markets.
1Q11 indicates temporary earnings peak for most Asian refiners
While 2011E quarterly utilisation rates are likely to be steady to nudging up
in coming quarters, we note 1Q11 likely indicates a temporary peak of
Asian refiners’ earnings from strong inventory gains and light-heavy oil
price differential. Moreover, the YoY earnings growth momentum will start
slowing down after Sep’11 quarter despite distillate cracks finding support
from likely Chinese imports as domestic market remains tight, in our view.
Prefer SK Innovation and HPCL (CL-Buy), IOC, Sinopec; Sell Thai Oil
We like SK Innovation owing to its exposure to upstream E&P amid higher
oil price outlook in 2012E and moderate refining margin leverage. We like
the regulated refiners HPCL (Conviction Buy) and IOC, Sinopec (both Buy)
owing to their defensive nature. We retain Sell rating on Thai Oil. Weak
demand and project delays remain key risks to our margin forecasts
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