China Oil and Gas: Iranian oil may take time to come back

Additional Iranian oil supply may not come out till 2H16.

    Maintain positive view on moderate recovery in oil price.

    Prefer oil majors to oilfield services players.

    An agreement finally reached for Iran nuclear talk .

    Iran and a group of six nations led by the U.S. finally reached a nuclear deal on 14 July 2015 after prolonged talks that spanned 20 months. Iran will be required to implement strict limits on its nuclear programme for more than a decade in return for the lifting sanctions against Iran. However, before the lift of sanctions, the International Atomic Energy Agency (IAEA) needs to verify that Iran has taken steps to shrink its nuclear programme after on-site inspections.

    1.2mbpd (or 1.3%) of additionaloil supply on the way .

    Sanctions imposed by U.S. and EU in 2011-12 have led to a significant cut in Iran’s oil production and exports. It exported 1.4mbpd of crude oil in 2014, down from pre-sanction level of 2.6mbpd in 2011, implying as much as 1.2mbpd of oil supply will come back to oil market upon the lift of sanctions. However, there are uncertainties for the timing and magnitude of recovery in oil supply, such as the current condition of oil fields and infrastructure that were shut in, the pace of sanctions relief and the ability of Iran to find buyers in the present market.

    Limited impact in the shortterm .

    Given the complicated and strict terms in the agreement that Iran needs to comply, we expect that additional Iranian oil supply may not come back till 2H16, which may significantly reduce the impact on the current glut oil market. Meanwhile, the increasing oil demand in 2016 during low price environment may help to absorb additional supply. We remain positive on the balancing of oil market in 2016, which may underpin a moderate recovery in oil prices which we estimate at USD65bbl/75bbl in 2015/16 vs current price of USD58/bbl.

    Maintainpositiveview on oil majors .

    We expect PetroChina and CNOOC to benefit from the moderate recovery in oil price and stricter cost control. Both are trading below 1.0x of 2016E P/B, which we believe are attractive given the weakened oil price already priced in their 1Q15 results. For details, please refer to our report on 7 July.