Global refining capacity by region
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:
- whether OPEC + cuts will be extended if oil demand disappoints for example on renewed pandemic concerns;
- if demand for certain products can positively surprise in a post-lockdown world (single use plastics and gasoline);
- whether China gas prices will fall more than expected this winter given local and global oversupply; and
- 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.