Oil & Gas: Will it, or will it not?

26 Mar 2024 , 03:16 PM

The events at the Red Sea have pushed up Brent 4% MoM, while outages at few refineries has worsened already tight product markets (GRMs up 15% MoM). Risk of run-away increase in oil remains low as OPEC surplus capacity is ~5mbpd, which benefits Indian upstream and downstream cos; their valuations are cheap, even on assumptions of moderation in GRM + lower marketing margins in FY25/26; any correction in PSU stocks on the back of cut in auto fuel prices, etc. is a good entry point; window to announce such populist measures is narrowing however.

Cracks widen:

Events at the Red Sea have heightened supply disruption risks for oil, for which prices are up 4% MoM; forced outages in a few regional refineries has meanwhile worsened already tight product markets, and widened cracks of MS, HSD, ATF; SG benchmark GRM is up 15% MoM at US$9/bbl in Feb-TD (YTD US$6.7/bbl vs US$11/bbl YoY). Comfortable inventory levels are leading to lower LNG prices (below US$10/mmbtu), which bodes well for consumption pickup in EU and Asia. Significantly, PE/PP/PVC spreads are up 4%/4%/22% MoM, accompanied by PX/MEG up 4%/1% MoM; it needs to be seen if this sustains, as supply overhang is real, while consumption weak.

Will Govt turn populist?

Meanwhile, as per the Indian oil minister, OMCs have partly recouped auto fuel losses of FY23, and a price cut is likely if Q4 is strong. Media speculates that the Election Commission will announce dates for central elections sometime in March for which the window to implement auto fuel price cuts is narrowing; OMC stocks may fall with any such action; it will also adversely affect CNG volume growth and profitability. ONGC and OIL meanwhile are confident to grow O&G production in FY25ii by at least 5-8% YoY.

Downgrade GUJGAS to Reduce:

On back of weak Q3, analysts of IIFL Securities cut GGAS’ FY24/25 EPS by 4-7% and see risk to consensus forecasts, which seem to be building in benefits of weak LNG, whereas company may opt to pass on such benefits to gain volumes. Analysts of IIFL Securities see valuations rich (33x FY25), and downgrade stock to REDUCE. OMCs and upstream cos trade cheap; FY25/26 forecasts assume benign oil, moderation in GRMs, and autofuel margins. BPCL is analysts of IIFL Securities top pick; ONGC/OIL are good tactical allocations.