KGI Upgrades Energy Sector to “Overweight,” Expecting High Earnings over Rising Oil Price

KGI Securities upgraded its outlook on the energy sector from “Neutral” to “Overweight” as the recovery in oil prices and refinery margin in 2021 would support energy companies in the market to report an earnings growth.

KIG upgraded the Energy Sector to Overweight, from Neutral, thanks to high earnings growth in energy companies, mainly from the recoveries in crude price and refinery margin in 2021. The security company expected huge earnings growth of 346% in 2021 and 24% in 2022 for its Energy coverage.

With its bullish view on the refinery market in 2021, KGI preferred companies whose refinery business contributes more than 50% of total EBITDA such as Thai Oil (TOP), ESSO Thailand (ESSO), and Star Petroleum Refining (SPRC). Refinery contributions for these companies are 60%, 70%, and 100% respectively. TOP, ESSO, and SPRC are KGI’s current top pick in the energy sector for 2021.

KGI also reiterated a rating of Outperform on PTT Pcl. (PTT) thanks to the upcoming listing of PTT Oil and Retail Business Company Limited (OR), which is expected to enter into SET50.


KGI forecasted Dubai crude price to rise from US$42/bbl in 2020 to US$53/55/bbl in 2021/22 thanks to i) higher oil demand as the COVID-19 outbreak eases and vaccinations become widespread from 2021 onwards and ii) strong cooperation of OPEC+ to follow supply cut quotas, while KGI maintained the long-term price of US$55/bbl.

In 2020, US Energy Information Administration (EIA) estimated global crude demand to decline by 8.9MBD YoY due to the COVID-19 outbreak. However, demand was expected to grow by 5.8MBD YoY to 98.2MBD in 2021 thanks to the beginning of vaccinations worldwide with Pfizer and Moderna vaccines in December 2020 and AstraZeneca vaccine in January. Meanwhile, the additional unilateral cut of 1.0MBD from Saudi Arabia is a positive surprise to the crude market although OPEC+ agreed to allow Russia and Kazakhstan raise supply by a combined 75,000BPD in February and March, while the other members would maintain their supply cut quotas.


KGI believed refinery-product spreads will increase gradually every quarter and then reach their normal levels in 2H21 mainly thanks to i) higher oil demand and ii) refinery closures and converting to terminal or biofuel plants of about 1.5MBD in 2020 and 0.4MBD in 2021, while there would be not much new refinery supply in the Asia Pacific and the Middle East during 2020-22. The security company also saw a good signal from the turnaround in jet oil spread from negative to positive since October 2020. Jet oil demand was expected to recover by 1.3MBD YoY to 4.0MBD in 2021 after the International Air Transport Association (IATA) forecasted world airline demand to grow 50% YoY in 2021. Thus, KGI reiterated the assumption of higher gasoline, jet oil, and diesel spreads of US$9.0/6.0/12.0/bbl in 2021, up YoY from US$4.4/2.5/6.1/bbl in 2020.


Polyethylene (PE) prices were expected to bottom out in 2Q20 and will recover gradually, following a higher crude price. However, the PE market is still pressured by high new PE supply of 7.8MTA and 7.9MTA in 2021-22, compared to the normal demand growth of 4.0MTA.

In addition, KGI also expected PP spread to drop YoY in 2021 due to high new PP addition of 6.9MTA this year although the spread increased substantially in 4Q20, given i) tight regional supply during maintenance shutdowns and ii) recovery in the automotive segment. Thus, the security company estimated PP spread to decline YoY to US$570/ton in 2021.


Lastly, KGI forecasted PX and BZ spreads to rise YoY to US$280/ton and US$170/ton in 2021, respectively, thanks to less new PX supply of 2.5MTA in 2021 than 7.8MTA in 2020. In addition, BZ spread soared 125% QoQ to US$160/ton in 4Q20, supported by dramatic jumps in spreads of BZ downstream derivatives such as BPA and ABS after the automotive producers in Asia returned to the market.