Energy Asia oil, gas and chemicals -Outlook 2H20: Back to "basics"

Capacity growth & weak demand post COVID-19 could overhang refining margins for years. Gasoline may positively surprise if public transportation is avoided which could benefit refiners with domestic retail marketing exposure (China + India)

17 Jun 2020

Global refining capacity by region

Source: UBS Evidence Lab, 315i, China Customs, NBS, Datastream, Reuters, UBS estimates, Baker Hughes

This chart shows global capacity growth for refiners by region for 2019 - 2023.

Asia Energy stocks have been rewarded if diversifying out of the sector

So  far  this  year,  investors  have  rewarded  selected  energy  sector  companies  that  have shown success at diversifying into alternative business. However,  as  the  market  has  started  to  price  in  these  unique  stories,  investors  may  need  to  look  back into  the  more  traditional  oil  chain  exposure  (back  to  "basics")  if  to  outperform  the  sector during 2H20.

What will be the key debates for the rest of this year?

We believe key debates for investors in 2H20 may include:

  1. whether OPEC + cuts will be extended if oil demand disappoints for example on renewed pandemic concerns;
  2. if demand for certain products can positively surprise in a post-lockdown world (single use plastics and gasoline);
  3. whether China gas prices will fall more than expected this winter given local and global oversupply; and
  4. whether growing oil service workloads in China can be profitable when global margins remain under pressure.

Gradually rising oil prices should provide a positive back-drop

We believe slowly rising oil prices will provide a positive backdrop for the integrated oil chain in the coming 6-12 months although we would still be selective on stocks based on  company  specific  or  country  specific  characteristics.  For  Exploration & Production,  given  that  gas  prices  could disappoint in some Asian markets, we would focus on low cost oil producers. For refiners, we would avoid those overly exposed to exports (Korea, Thailand) and favour those with more insulated domestic and retail market exposure (China and India)  (UBS Evidence Lab retail oil product price tracker indicates China retail gasoline spreads at 3-year highs). For petrochemicals, we prefer poly-olefin exposure.

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