Oil and Gas:Near-term oil price under consolidation pressure

Brent oil price averaged at US$48/bbl in June, being the highest level since October 2015 but oil prices faltered in late June through mid-July. We believe that the pressure was contributed by the concerns over future economic growth from Brexit, easing of Nigeria and Canada supply disruptions, as well as OPEC production reaching new all-time high. EIA lifted Brent oil prices projection by US$1/bbl to US$44/bbl for 2016E, which is slight US$1/bbl below our projection. We maintain neutral view on crude oil prices in 2H16E at US$50/bbl.

    China apparent crude oil consumption dropped 1.1% YoY to 47.1mt in June, the first decline since June 2015 given enlarged 8.9% YoY decline in domestic production and moderate 3.8% YoY increase in imports. Overall crude oil consumption growth slowed down from 9% YoY in 5M16 to 7.2% YoY in 6M16, still beating 5.7% YoY growth in 2015.

    Despite further decline in US crude oil production, non-OPEC oil supply increased by 0.5mbpd MoM to 56.7mbpd in June due to recovery in Canada sands oil production after fade-out of wild fire in May. Global oil supply increased by 1.0mbpd MoM in June, the largest increase since March 2015. Meanwhile US oil rig counts reported by Baker Hughes rose by 10 WoW for the week of 8 July and reached 351. It’s the fifth increase in the past six weeks. We believe that the continued recovery in US drilling activities may put pressure on oil market in the short-term.

    Despite recovery in oil price in 2Q16, we expect domestic oil and gas producers to report slight losses in 1H16E given average oil price still slight below their breakeven cost. Meanwhile we expect oilfield services players to continue to suffer significant losses given no signs of recovery in upstream capex at current moderate oil price. Sinopec Kantons remains our top pick for the sector given its attractive valuation and solid earnings growth outlook.