Oil and Gas:Oil price struggles at key resistant level

Oil prices struggles at US$50/bbl, key resistant level.

    Crude oil rose marginally over the key resistant level of US$50/bbl in earlyJune despite another failure of production ceiling talk during OPEC routinemeeting on 2 June. We believe that several factors support recent strongeroil prices, including supply disruption in Nigeria due to militants attacks,weakened US dollar and peaking out of US crude oil inventory. Brent oilprice averaged at US$47/bbl in May, implying a $5/bbl increase from Aprilwith Brent premium down from US$1.3/bbl in April to US$0.3/bbl in May.

    EIA lifted Brent oil prices projection by US$3/1/bbl to US$43/52/bbl in2016E/17E, which is slight US$2-3/bbl below our projection.

    Low oil price boosts China imports.

    China crude oil imports maintained at robust 32.2mt in May, lifting totalimports to 156mt in 5M16, up 16.5% YoY versus 3.7% YoY decline indomestic production during the period.

    US oil production down further but recovery in rigs count.

    US crude oil production averaged at 8.7mbpd in May, down 1mbpd fromthe peak in April 2015. Meanwhile US oil rig counts reported by BakerHughes increased by 9 WoW to 325 for the week of 3 June and rose againby 3 in the following week, the first consistent increase this year. Webelieve that the recovery in drilling activities amid recent recovery in oilprice may curb the further upside on oil price.

    Switching to mid-downstream players.

    We believe that mid-downstream players would benefit most from arelatively stable oil price environment. We initiated Sinopec Kantons (934HK) with BUY rating and TP of HK$5.14 (please refer to initiation report on30 May). We believe Sinopec Kantons would be the key beneficiary ofrobust China crude oil imports given its more than 50% market share indomestic crude oil jetty services market. Meanwhile its newly acquired gaspipeline is expected to leverage on robust China natural gas demand in thelong run. It is trading at 2016E P/B of 0.9x versus ROE of 12.3%, which webelieve is attractive given solid earnings growth outlook.