Record high oil-demand: Which stock will gain, which will lose, according to Nomura

Not all upstream refiners will benefit equally, according to the brokerage. (Representative image)

Global oil demand is set to hit a record high of 101.9 million barrels/day (b/d) in CY23, and this will be a big positive for Reliance Industries and weigh heavily on oil-market companies (OMCs) bottomline, according to a report by Nomura.

The International Energy Agency (IEA) has said that oil demand is set to grow by 2 million b/d year-on-year (YoY) to hit a record in CY23. According to the brokerage firm, this will be driven by China reopening, with the country seeing an incremental demand of 0.9 million b/d, which will be 45 percent of the incremental global oil demand.

Also read: IEA raises global oil-demand forecast as China's reopening picks up

According to Nomura’s analysts, this will cause a sharp improvement in refining margins and that will benefit particularly RIL, with the refiner’s SEZ refinery exempt from Special Additional Excise Duty (SAED) and windfall taxes. The analysts see around 16 percent upside to the stock, with a target price of Rs 2,850.

“The outlook for refining remains robust for CY2023 underpinned by strong oil demand growth of 2 mn b/d, which will significantly outpace refinery throughput additions of 1.5 mn b/d in CY2023,” said the brokerage’s report.

This should come as a relief to refiners because their margins had been impacted in recent weeks by the decline in diesel spreads with the sharp inventory build-up in the European Union (EU), which was looking to build stockpiles prior to sanctioning of Russian petroleum products.

“However, refining margins are anticipated to improve sharply from current levels given the significant uptick in demand over 2HCY23 — global oil demand is anticipated to rise by 2.4 mn b/d y-y in 2HCY23 and by 2.1mn b/d versus 1HCY23, underpinned by robust growth across China and other Asian countries, whereas incremental refinery throughput will be lower at 1.5 mn b/d,” stated Nomura’s report.

The analysts also expect Russian refiners to cut their utilisation rates because they have been finding it hard to place their products.

“We believe RIL (RIL IN, Buy) is best placed to take advantage of the refining upcycle; furthermore, with the removal of the SAED/windfall taxes on the company’s SEZ refinery, RIL will be able to capture premiums on supplying products to Europe. We see upside risks to our refining margin estimates of $12/bbl in FY2024F and note that RIL’s EPS has 4 percent sensitivity for every $1/bbl of refining margins. We reiterate our Buy rating and TP of Rs 2,850; RIL is our top pick in the Indian oil and gas space,” they wrote.

They do not have the same optimism about other upstream companies such as ONGC and Oil India, on which they have a reduced call, because they see the government increasing SAED obligations for them to limit realisations to around $75/bbl.

Also read: Why the brief respite for OMCs may end soon

‘Reduce’ on OMCs

Nomura’s analysts retained their reduce rating for all three PSU OMCs (HPCL, BPCL and IOCL), adding that the Street’s optimism on the marketing companies is likely to be short-lived because there are “clear headwinds to the recent improvement in marketing margins”. The marketing companies have recently benefited from moderation in crude oil prices and in diesel spreads with the European Union’s stockpiling.

The brokerage’s analysts said that both benefits are likely to “fade away” with the unfolding market dynamics and the surge in demand in the second half of CY23.

The marketing companies are still grappling with their huge debt piles--IOCL’s gross debt has increased 30 percent to Rs 1.4 lakh crore from end-FY22 levels; BPCL’s debt has increased by 20 percent to Rs 40,300 crore; and HPCL’s gross debt has increased 49 percent to Rs 64,200 crore. Added to this will be the elevated crude oil prices and unyielding capex, all of which will “significantly impact cash flows”.

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