The global demand for crude oil for 2022 is expected to diminish by another 0.3 million barrels per day (mmbpd), the International Energy Agency (IEA) said in its latest Oil Market Report. The agency had a month back predicted a 1 mmbpd reduction in demand.
The global demand for the year is now revised to 99.4 mmbpd which is still 1.9 mmbpd higher than what it was a year ago.
The factors impacting the crude demand this year are a drop in China’s oil demand on account of lockdown and a surge in commodity prices and sanctions on Russia which have moderated the global economic growth.
OPEC countries are not willing to increase their production. Their current production is in fact well below their output targets. This, coupled with the ongoing Russia-Ukraine crisis, is likely to keep the supply side under pressure in the near term, resulting in a rise in global crude prices.
"Issues surrounding the pandemic and possible further material inventory releases could limit the extent of the rise in oil prices,” a report from Kotak Institutional Equities said.
Global oil supply to remain tight
Experts are of the opinion that the global oil supply will remain constrained in the near term, driven by the ongoing decline in Russian oil exports and OPEC plus other oil producing nations (OPEC+) yielding well below their production targets.
According to IEA estimates, 0.7 mmbpd of Russian supply was offline in April till date, compared to March, which could increase sharply in the coming months as the full effect of Russian sanctions flows through. The agency expects 1.5 mmbpd of Russian oil supply to be hit in April (0.7mmbpd shut so far).
“The projects shut-ins are expected to rise to 3 mmbpd from May 2022 as more buyers avoid Russian crude and Russian storage fills up,” a report from JM Financial Institutional Securities said. “Reduction in Russia’s oil product exports is also likely to rise, with its refinery throughput having already declined by 0.6 mmbpd in March 2022 and likely to fall by 1 mmbpd on average in CY22.”
OPEC idle capacity
Production from the OPEC+ remains well below targets, with March production of 39.7 mmbpd remaining broadly steady on a month-on-month basis but it lagged the production targets by 1.6 mmbpd.
The data showed that in March 2022, the OPEC+ output was up by only 40 kbpd (kilo barrels per day) MoM (as against a target to increase it by 400 kbpd). Apart from the absence of Russian oil, the decline was due to lower output in Libya which was down 60 kbpd at 1.1 mmbpd.
Output from Saudi Arabia increased marginally and was up 50kbpd at 10.28 mmbpd and the UAE increased its production by 30 kbpd at 2.99 mmbpd while output was flat in Iran at 2.56 mmbpd.
“OPEC compliance was at 157 percent while OPEC+ compliance was at 159 percent in March 2022; the gap between OPEC+ output and its target hike is a high 1.5 mmbpd, further tightening the demand-supply balance,” a report from JM Financial said.
Further, experts believe that despite some progress on revival of the Iran nuclear deal, any additional supplies from Iran could be at least a few months away with a potential to add 1.2 mmbpd to get to the pre-sanction level of 3.8 mmbpd.
Also, Venezuela could take at least 3-4 months to add ~0.2-0.3 mmbpd if US sanctions are eased.
Release of strategic inventories
As per a report from JM Financial, by the end of February 2022, OECD’s (organization for economic co-operation and development) oil inventory had declined 42 mmbbl (million barrels) MoM to 2,611 mmbbl, an 8-year low and 320 mmbbl below the 5-year average. The inventory fell by a further 9 mmbbl MoM in March 2022.
However, the silver lining is that the impact from absence of Russian crude will likely be partly offset as the US and other oil consuming nations would release 240 mmbbl of oil from strategic reserves in the next 6 months. This will also likely help rein in the rising crude prices.
Oil prices to remain firm
With the demand – supply imbalance likely to persist in the near term, the oil prices are expected to maintain their elevated levels.
Kotak has raised its oil price estimate to $90/bbl for FY2023 as it expects oil prices to remain elevated in the near term because of, “the ongoing uncertainty that oil markets face from the Russian-Ukraine conflict; lower exports of Russian crude oil and petroleum products driven by self-sanctioning and curtailed increases in oil production by the OPEC+ cartel in the near term to ease a tight market”.
Beneficiaries
Among the stocks, ONGC, Oil India and GAIL are the major beneficiaries of high crude prices. “Every $ 1/bbl rise in crude price results in an increase in our valuation of ONGC and Oil India by 2-4 percent and higher crude price improves the earnings visibility of GAIL’s gas trading and downstream businesses, which constitute 40-50 percent of its EBITDA,” said JM Financial. It has a ‘buy’ recommendation for all these three stocks.
Kotak also has a ‘buy’ rating on GAIL with a fair value of Rs 195 per share as it benefits from a rise in profitability of LPG production and LNG marketing segments. It however, retains its ‘sell’ rating on ONGC and OIL despite higher leverage of profitability to oil prices. It believes that the stocks already factor elevated prices sustaining in FY2024, while production and operational trends provide no comfort.
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