Brent prices averaged $103 per barrel in July, up 7% month-on-month (m-o-m), by reduced Organization of the Petroleum Exporting Countries (OPEC) supply as sanctions on Iran came into effect from July 1, 2012, and also witnessed continued US crude inventory drawdown.
Sharp increase in light distillate spreads led to 45% m-o-m increase in Singapore gross refining margins (GRM) to $8.1 per barrel in July. Gasoline spread was up 60% m-o-m, led by strong summer demand from Middle East and Europe. Diesel spread was up 15% m-o-m, led by power deficit in India, Ramzan holidays and in anticipation of strong demand from Australia after planned closure of Clyde refinery.
Likely price hikes in controlled products is a positive trigger for oil public sector units. We prefer Bharat Petroleum Corp. Ltd among oil marketing companies due to its strong exploration and production potential and upstream companies, Oil and Natural Gas Corp. Ltd and Oil India Ltd, due to their attractive valuations and dividend yields. Maintain neutral on Reliance Industries Ltd due to subdued outlook on refining and petrochemical business and decline in KGD-6 production. We maintain neutral on GAIL (India) Ltd and Gujarat State Petronet Ltd due to headwinds on incremental gas availability. However, domestic gas scarcity augurs well for Petronet LNG Ltd.
Edited excerpts from a report by Motilal Oswal Securities Ltd. Your comments are welcome at email@example.com.
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