Korean Refining, Chemical, And Utility Outlook: Oil Price To Face Inflection Point In May

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Includes: BNO, DBO, DBRT, DNO, DTO, DWT, KEP, LGCLF, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SOOCY, SZO, UBRT, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU
by: Hyundai Motor Investment & Securities

Summary

We raise our oil price forecast in light of tight crude oil supply and geopolitical risks; we see negotiations on Iran’s nuclear program, scheduled for May, as an important event.

Barring a drastic turn of events, WTI crude is unlikely to hold up above USD70/bbl for a prolonged period.

Refining: oil price strength suggests strong crude oil demand, which positively affects inventory valuation gain and a lagging effect. However, further oil price hikes have the potential to suppress demand.

We raise our oil price forecast in light of the currently tight crude oil supply and geopolitical risks. The negotiations over Iran’s nuclear program, scheduled for May, is critical event. Barring a drastic turn of events, the price of WTI crude is unlikely to hold up above USD70/bbl for an extended period.

For the overall refining, chemical, and utility outlook, we believe oil price strength suggests strong crude oil demand, which positively affects inventory valuation gain and a lagging effect. However, further oil price hikes have the potential to suppress demand. For chemicals, raw material price hikes are negative but supply will become tighter in 2H18. The economic benefits of driving EVs will be further highlighted. For utilities, the inflationary environment is positive for KOGAS. KEPCO (KEP) faces cost burdens.

Upside pressure on oil prices

The price of WTI crude is approaching USD70/bbl. Brent crude has already risen to USD74/bbl. Despite US President Donald Trump’s accusation that oil prices are artificially very high because of OPEC, oil price corrections have been negligible. We have been saying that the price of WTI crude will average USD64/bbl in 2018. However, we now see upside pressure on oil prices increasing. Accordingly, we raise our forecast to USD65.7/bbl.

We do not believe the price of WTI crude can remain above the USD70/bbl mark for long. We project oil prices will range between USD60-72/bbl, because sharp oil price hikes could have a negative impact on crude demand. As growth in crude oil demand is slowing, there may be concerns that oil price increases could fast forward a period of “peak demand.” The chairman of Pioneer Resources, a major independent E&P player, said demand will shift to alternative energy and oil prices in the USD70-80/bbl range do not benefit anyone. The Iran nuclear deal with the US (JCPOA) scheduled in May will likely provide an inflection point for oil prices in the short term.

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