Cathay Securities: What would be the impact on the oil and gas industry if the Russia-Ukraine conflict ends?

According to the Zhitong Finance APP, Guotai Junan has released a research report stating that it maintains an "overweight" rating for the oil and gas industry. If the Russia-Ukraine conflict ends and Europe resumes imports of Russian pipeline gas while reducing imports of American LNG, gas prices in Europe and the United States may decline, potentially widening the price gap between domestic and international gas, benefiting related companies. In terms of crude oil, the discount advantage for domestic refineries importing Russian oil may gradually diminish, while major refineries are expected to benefit.

Guotai Junan's main points are as follows:

Maintain industry overweight rating

In terms of natural gas, during the Russia-Ukraine conflict, Russian pipeline gas exports to Europe were significantly affected, raising European gas prices. The firm believes that if the conflict ends and Europe resumes imports of Russian pipeline gas while reducing imports of American LNG, gas prices in Europe and the United States may decline, potentially widening the price gap between domestic and international gas. It recommends companies with receiving station assets such as ENN-NG and JovoEnergy. In terms of crude oil, during the conflict, China increased its imports of Russian oil, and domestic refineries seized the market opportunity of low-cost raw materials, gaining a cost advantage compared to major refineries. The firm believes that as the conflict ends, the discount advantage for domestic refineries importing Russian oil may gradually diminish, making it difficult to sustain the cost advantages brought by flexibility in raw materials. It recommends major refineries such as HLSH, Rongsheng Petrochemical, and Sinopec.

Before the Russia-Ukraine conflict: Russia exported a large amount of oil and gas to Europe

Russia has a good endowment of oil and gas resources and exports a large amount to other countries and regions. Before the outbreak of the Russia-Ukraine conflict in 2021, Russia's natural gas production was 702.1 billion cubic meters, while domestic demand was only 431.5 billion cubic meters, with the remaining 201.3 billion cubic meters exported in the form of pipeline gas, mainly to Europe, and 39.5 billion cubic meters exported as LNG. Russia's crude oil production was 512.12 million tons, with exports of 244.14 million tons, nearly half of its production.

After the outbreak of the Russia-Ukraine conflict, Russian oil and gas resource exports shifted from Europe to other countries such as China

In terms of LNG, from 2021 to 2023, due to the shutdown of the Nord Stream pipeline, Russia's pipeline gas exports to the EU decreased by 106.6 billion cubic meters, and exports to other regions in Europe decreased by 10.6 billion cubic meters. In terms of crude oil, from 2021 to 2023, due to sanctions from Europe and the United States, Russia's crude oil exports to Europe decreased by 10.625 million tons, exports to the United States decreased by 991,000 tons, and exports to Japan decreased by 434,000 tons. To mitigate the impact on exports, Russia has increased oil and gas exports to other countries such as China and India.

Outlook on the oil and gas supply and demand pattern in various regions if the Russia-Ukraine conflict ends

The situation in Europe and the United States is becoming more relaxed, while China is becoming more tense. The firm believes that if the Russia-Ukraine conflict ends and sanctions against Russia are lifted, the structure of Russian crude oil exports may change, and natural gas supply may increase; the structure of European crude oil imports may change, and natural gas imports may increase; the structure of China's crude oil imports may change, and the easing of natural gas supply may be alleviated; and American LNG prices may decline.

Risk Warning: Macroeconomic and energy demand declines exceed expectations; geopolitical events causing significant fluctuations in gas prices; risks of industry policy implementation falling short of expectations