The shift in oil demand growth from OECD countries to non-OECD countries, coupled with an increasing refining overcapacity has put pressure on global refinery utilization rates and refining margins. Against this backdrop, Singapore said that it has no plans to attract any more green-field refinery investments, and will focus on getting existing refineries to upgrade or expand their facilities to produce higher-value petrochemicals, fuels and lubricants. We believe the net effect will be fewer jobs and even stiffer competition for the EPC contractors. As such, we maintain our UNDERWEIGHT on the sector. We like PEC (BUY; FV: S$0.76) for its attractive valuations, but would avoid Rotary (SELL; FV: S$0.34) as we believe the risk of further cost over-run is still relatively high.
Oil demand has peaked in developed countries
According to some observers, oil demand in the developed countries may have already peaked and is currently on a long-term downtrend (IHS, The Economist). Indeed, oil demand in the OECD countries has been sluggish over the past several years, resulting in massive refining overcapacity. The key reasons for the declines are: (i) aging population and slowing growth rates, (ii) saturated car ownership rates, (iii) tighter fuel efficiency standards, and (iv) use of new technologies like hybrid electric vehicles.
Developing countries continue to add refining capacity
Meanwhile, the developing world has been adding new refining capacity to meet its growing domestic oil demand. For example, China’s refining capacity jumped by 51% since 2005 to 10.8m barrels daily in 2011, while its oil consumption increased by 41% to 9.8m barrels daily over the same period. In the Middle East, some countries (i.e. Saudi Arabia, UAE) are embarking on refinery projects to produce higher valued derivatives for the export market – a marked departure from its traditional role of just selling crude oil overseas. These new refineries are massive in scale and could easily outperform the older ones in Europe and America. Also, the refineries benefit from significant cost savings due to proximity to the crude oil producing regions (in the case of Middle East) or to the end-market (in the case of China).
Global margin squeeze
The shift in oil demand growth from OECD countries to non-OECD countries, coupled with an increasing refining overcapacity has put pressure on global refinery utilization rates and refining margins. Against this backdrop, Singapore said that it has no plans to attract any more green-field refinery investments, and will focus on getting existing refineries to upgrade or expand their facilities to produce higher-value petrochemicals, fuels and lubricants. We believe the net effect will be fewer jobs and even stiffer competition for the EPC contractors. As such, we maintain our UNDERWEIGHT on the sector. We like PEC (BUY; FV: S$0.76) for its attractive valuations but would avoid Rotary (SELL; FV: S$0.34) as we believe the risk of further cost over-run is still relatively high.
According to some observers, oil demand in the developed countries may have already peaked and is currently on a long-term downtrend (IHS, The Economist). Indeed, oil demand in the OECD countries has been sluggish over the past several years, resulting in massive refining overcapacity. The key reasons for the declines are: (i) aging population and slowing growth rates, (ii) saturated car ownership rates, (iii) tighter fuel efficiency standards, and (iv) use of new technologies like hybrid electric vehicles.
Developing countries continue to add refining capacity
Meanwhile, the developing world has been adding new refining capacity to meet its growing domestic oil demand. For example, China’s refining capacity jumped by 51% since 2005 to 10.8m barrels daily in 2011, while its oil consumption increased by 41% to 9.8m barrels daily over the same period. In the Middle East, some countries (i.e. Saudi Arabia, UAE) are embarking on refinery projects to produce higher valued derivatives for the export market – a marked departure from its traditional role of just selling crude oil overseas. These new refineries are massive in scale and could easily outperform the older ones in Europe and America. Also, the refineries benefit from significant cost savings due to proximity to the crude oil producing regions (in the case of Middle East) or to the end-market (in the case of China).
Global margin squeeze
The shift in oil demand growth from OECD countries to non-OECD countries, coupled with an increasing refining overcapacity has put pressure on global refinery utilization rates and refining margins. Against this backdrop, Singapore said that it has no plans to attract any more green-field refinery investments, and will focus on getting existing refineries to upgrade or expand their facilities to produce higher-value petrochemicals, fuels and lubricants. We believe the net effect will be fewer jobs and even stiffer competition for the EPC contractors. As such, we maintain our UNDERWEIGHT on the sector. We like PEC (BUY; FV: S$0.76) for its attractive valuations but would avoid Rotary (SELL; FV: S$0.34) as we believe the risk of further cost over-run is still relatively high.
No comments:
Post a Comment