Investors have expressed concerns over the sustainability of robust oil

demand growth (and current high prices) due to the recent cut in fuel

subsidies across Asia. In our view, the subsidy cuts in Asia are unlikely to

have any meaningful impact on global oil demand growth. We believe

China and India will continue to adopt a gradual approach to adjusting fuel

prices rather than removing subsidies completely and allowing domestic

fuel prices to align with market prices.

We believe the subsidy concerns are partially responsible (profit taking is

the other reason) for the underperformance of upstream oil equities. We

do not share the same concerns and affirm our structurally positive

outlook on oil prices. We believe investors should accumulate select Asian

E&P equities given their recent share price pullbacks.

We reiterate our Buy rating and maintain on our Conviction list CNOOC

(0883.HK, CEO), Cairn India (CAIL.BO), and INPEX (1605.T) with 12-month

target prices of HK$16.5/US$212 (DCF-based), Rs340 (NAV-based) and

¥1,690,000 (DCF-based), respectively. We also like Buy-rated CITIC

Resources (1205.HK) with a 12-month SOTP-based target price of HK$6.2.

In addition to the higher oil prices, we believe the stocks we favor have

specific M&A catalysts and/or above-average exploration potential. In our

view, an adjustment to China’s special oil income levy will also be a

positive catalyst for CNOOC and CITIC Resources.

Key risks include a sharp pullback in oil prices, any major project delays

and detrimental government measures.