BackOil stocks show mix reactions to OPEC+ production cut; HPCL, BPCL down 4-5%. Here's why!
Oil stocks are in focus after several OPEC+ countries, led by Saudi Arabia, announced voluntary cuts from May 2023 to end-2023 of nearly 1.1mb/d. Oil market is expected to get tighter after the OPEC+ output cut couple with higher oil prices. Indian OMCs are seen likely to be under pressure.
PremiumOil stocks traded broadly on a mixed note during Monday's session after the Organization of the Petroleum Exporting Countries (OPEC) trimmed production for the current year. OMCs such as HPCL and BPCL took a massive hit and plunged by 4-5%. Heavyweight RIL and Adani Group's Adani Total Gas were also under pressure. However, Petronet LNG and ONGC emerged as top gainers. Also, crude oil prices have shot up sharply. Investors are cautious as oil market is seen to get tighter ahead.
At the time of writing, BSE Oil & Gas index dipped by 126.16 points or 0.73% to trade at 17,257.24. The index was near its day's low of 17,230.93.
HPCL was the top underperformer by plunging nearly 5% followed by BPCL which shed 4.2%. Adani Total Gas and Indraprastha Gas dipped by 2.9% and 2.08%. Indian Oil slipped by around half a percent, while Reliance Industries was marginally lower.
Among the gainers, Petronet LNG took lead, surging by 2.2%. ONGC advanced by 1.8%. While Gujarat Gas and GAIL are marginally up.
Crude oil prices picked up on Monday after the OPEC+ output cut. Crude oil prices picked up on Monday after the OPEC+ output cut. Brent crude skyrocketed by over 4% and was trading near $81.23 per barrel, while US WTI zoomed by over 5% to trade near $79.6 per barrel.
Talking about the robust rise in crude oil prices, Ravindra V.Rao, CMT, EPAT, VP-Head Commodity Research, Kotak Securities said on Monday, WTI Crude oil futures showcased a fantastic recovery during the previous week and closed at $75.67 per bbl, up by 9.25%, owing to a weaker greenback, prospects of supply disruptions from Iraq and improved risk sentiments amid ease in banking sector fears. Risk sentiments improved following reports that US authorities are considering expanding an emergency lending facility for banks. Meanwhile, half a percent of global supply was disrupted after Iraq had won a longstanding international arbitration case that led to a cease in oil exports from the semi-autonomous Kurdistan region through Turkey.
Further, Rao added, in a surprise move on Sunday, OPEC+ oil producers announced voluntary production cuts amounting to around 1 mbpd, starting from May until 2023. The move by the cartel at a time when Chinese demand is expected to rise might bolster oil prices.
OPEC+ output and rising crude prices is likely to not be in favour of Indian oil marketing companies!
In its latest report dated April 3rd, Kotak Institutional Equities analysts said, several OPEC+ countries, led by Saudi Arabia, have announced voluntary cuts from May 2023 to end-2023 of nearly 1.1mb/d. Including the 500kb/d cut announced by Russia recently, these could total nearly 1.6mb/d. In contrast to OPEC+ production declining only by ~0.5mb/d from the announced 2mb/d cut in November 2022, the present cut may lead to a much larger production cut.
"The cuts reinforce our view of oil markets getting tighter in 2HCY23. Likely higher oil prices are negative for India as such, and particularly for OMCs," Kotak's note said.
The brokerage took note that while OPEC+ had announced a 2mb/d production cut from November 2022, the actual reduction in production has been only about 500kb/d. Several countries were already producing below-target levels and were not expected to cut. While countries producing higher than the target had cut production by ~1.2mb/day, this was offset by nearly 700kb/d higher production from countries that were producing below-target levels (such as Nigeria, Kazakhstan, and Russia).
In regards to OMCs, the brokerage said, "we believe that the oil markets will get progressively tighter, with rising demand (particularly China reopening), curbs on Russian exports, and US SPR releases slowing. Now, with OPEC+ announcing a large cut, and most of it likely to be implemented, the risk of the market getting tighter is higher, in our view."
According to Kotak, a higher oil price is negative for downstream oil marketing companies (OMCs) as under-recoveries on petrol, diesel, and LPG may return if oil prices rise to over $90/bbl as we believe OMCs are unlikely to get pricing freedom at least until 2024 general elections. For upstream companies, there will not be any benefits from higher oil prices, as windfall taxes limit oil price realization to about $75/bbl.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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