Shares of upstream oil companies--Oil and Natural Gas Corporation, Oil India and Hindustan Oil Exploration Company--fell upto 5 percent in opening trade on September 11 tracking a slump in Brent crude prices to their lowest level in almost three years.
Brent crude prices slipped below $70 per barrel overnight for the first time since December 2021, as concerns over weak demand amid moderating economic growth and rising electric vehicle adoption weighed heavily. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) also trimmed its demand forecast for the second time in two months, further dragging oil prices lower.
OPEC revised its 2024 oil demand forecast as it now expects growth of approximately 2 million barrels per day (bpd), which is 80,000 bpd lower than previous projections. The group of oil producers also predicts demand growth of 1.7 million bpd next year, a cut of around 40,000 bpd from earlier estimates.
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This downward revision follows OPEC's decision in August to lower its outlook, largely driven by weaker consumption in China, the world’s largest crude importer. Concerns over slowing demand in China have persisted, especially as the country experiences a surge in electric vehicle sales, casting uncertainty over the oil market for months.
Tracking signs of weakening demand, a slew of brokerages have also turned bearish on crude prices, with Morgan Stanley lowering its Brent price forecast from $80 to $75. Bank of America has also revised its crude oil price outlook for the second half of 2024, reducing it from $75 per barrel from the earlier $90. Similarly, Goldman Sachs also reduced its target for crude prices to $80, while UBS is forecasting $80, driven by worries over potential supply shortages.
A weak price outlook for crude rings alarm bells for upstream oil companies as it poses the threat of eating away their margins. Upstream oil companies stand to suffer from low crude prices as it has a direct bearing on their revenue and profit margins. With extraction costs remaining relatively stable, falling prices lead to lower profitability and hence weaker earnings.
On those concerns, shares of Oil and Natural Gas Corporation, Oil India and Hindustan Oil Exploration Company, have remained under pressure in recent times. Among the three, Oil India was the worst hit, with shares falling close to 5 percent, followed by Hindustan Oil Exploration Co, which was down nearly 4 percent. Shares of ONGC also fell around 2 percent.
Also Read | Upstream PSU oil majors weak on bearish forecasts, supply disruption
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