>Mothballing, capacity delays to lead refinery recovery and upcycle over medium term; Asian refiners key beneficiaries of higher cracks

Closures, project delays, demand outlook to drive upcycle in ’12-13E


While the market focuses on weak 4QCY11 results of refiners, we believe the global refining cycle is now heading for recovery and upcycle during 2012E-13E driven by 1) major mothballing of refineries in US/ Europe, 2) delays in new projects, 3) oil demand recovery from 2H12E. We also note there is only limited capacity addition after 2Q12E. Overall, global utilisation has moved up for all years: 2012E-14E. We believe the Asian refiners would be key beneficiaries of rising cracks while US/Europe refiners are plays on WTI-LLS and light-heavy oil spreads.


■ Supply side reaction to weak margins has picked up in US/Europe
We have witnessed announcements of mothballing of about 1.2 mb/d of refining capacity since Sep ‘11, of which 1.1 mb/d will take place until July 2012. In addition to this, we believe about 2.4 mn b/d of refining capacity in the western hemisphere remains under strategic review. This represents about two years of normalised oil demand growth globally.


■ Delay in new projects to support refining cycle over medium term
Moreover, we believe delays in new projects have become a central theme in the refining sector driven by delays in logistics, delays in acquiring land, obtaining clearances/permits and some tightness in engineering chain. We find more than half of the 1.5 mb/d likely delays for 2012E are in Asia.


■ Raise Singapore cracks for 2H12E-2013E, normalised 2014E margin
in line with oil forecasts; upgrade Asia refining stance to Attractive We raise our Singapore cracks forecasts for 2012E-13E by 20% and upgrade our refining sector stance to Attractive from Neutral. China will continue to have tight distillate supply over the medium term, in our view.


■ S-Oil, Thai Oil, RIL and Western are our favorite refiners
In Asia we upgrade S-Oil to Buy (CL), Thai Oil, RIL and GS Holdings to Buy, Caltex to Neutral; in US, Western Refining (CL), HollyFrontier, and CVR Energy remain our Buy-rated favorites. In Europe, we prefer the oil producers within the refining/integrated sector: RD Shell and BG (both CL Buy). Key risks: 1)Demand slowdown from weak macro, 2) oil price spike from low spare capacity in 2013E, 3) supply crunch from Iran tension escalation.


To read the full report: Global: Energy: Oil - Refining
RISH TRADER