China Oil &Gas Monthly:Growing imports;growing exports

There is a lot of data in Oil and Gas, especially for China. Our new monthlyproduct has 200+ charts and tables, with proprietary data on and analysis ofExploration & Production (E&P), Refining, Marketing, Chemicals and OilfieldServices (OFS) from around the globe, tying all the pieces together. NBS hasjust released O&G data for April/May depending on the data set. An emergingtheme for 5M16 is the strength in crude imports (+17% yoy) and rise inteapots' utilization. As a result, refined product exports have surged to newhighs, dampening regional refining margins.

E&P – Crude imports hover at all-time high; natural Gas demand stays resilient

China imported 32.2mt of crude in May, up 39% YoY and flat MoM. Apparentcrude demand for May reached 49mt, up 19% YoY and flat MoM, but crudethroughput was at only 44mt, suggesting continued build-up of either SPR orcommercial stocks. On 31 May, the NEA issued the draft discussion guidelineson National Oil Reserve Regulations, which could lead to further stockpiling ofcrude ahead, benefiting Kantons (934.HK). May and 5M16 natural gas demandremained strong after city gate price cuts to industrial users in Nov-15, upc.16% YoY, backing our Buy call on PetroChina. Spreads for gas price(industrial users – city gate) were down 1% MoM, pressuring gas distributors.

Refining and Marketing – strong GRM remains

China GRM remained healthy in May, averaging US$10.6/bbl (-17% MoM) vs.SG GRM of US$4.9/bbl, as the NDRC hiked refined product prices twice topass through the feedstock increase. Teapot refiners achieved a 47.4% run ratein May, down 2.6ppts MoM but up 3.1ppts YoY. The Xinhua news agencyestimated China diesel recorded growth of 3% MoM, while gasoline andkerosene demand dropped by -1% and 4% MoM. Oil product inventoriescontinued to build as China oil product (gasoline/diesel/kerosene) exportssurged by 19% MoM to 2.9mt despite higher product spreads in China.

Chemicals – margins under pressure

Chemicals margins were under pressure in May with the rise in feedstock cost,and we witnessed major product spreads dropping by 3-10% MoM (except forpropylene and butadiene). Moreover, with the G20 summit being held inHangzhou on 4-5 Sept, nearby chemicals facilities will be suspendedtemporary for the 14 days between 26 Aug and 6 Sep. Some of SPC’s facilitieswill be halted (C5/MTBE/PP/MEG/Polyester), but we see limited impact duringthe summer maintenance season.

OFS – too soon to Buy; stocks already pricing in a recovery in 2017

Based on IHS Petrodata, global jack-up demand reached a new low of 335 rigsin May 2016, resulting in an all-time-low utilization rate of 62%. Similarly,global semi-subs demand stood at 102 rigs with record-low utilization of 58%.Day rates for May 2016 were down 24% YoY for semi-subs and 26% YoY forjack-ups. Major domestic players such as SSC and COSL have seen no changein fundamentals either. Spending by upstream players has yet to pick up asthey await stability in the oil price. We have lowered our 2016 EPS est. by56%/50%/219% for Hilong, SSC and COSL, respectively. For 2017, earnings forOFS companies should improve on the anticipated recovery in oil prices, butstocks already price this in. We upgrade SSC and COSL from Sell to Hold.