The Organisation of Petroleum Exporting Countries and its allies (OPEC+) will support Brent crude at $80 per barrel and among Indian oil explorers, state-owned Oil India and Oil and Natural Gas Corporation (ONGC) are the most favorably placed to reap results.
Domestic brokerage firm JM Financials said in its latest report that the global oil supply growth of 1.8 mmbpd in CY24 is entirely (95 per cent) driven by higher output from non-OPEC+ countries such as US, Brazil, Guyana and Canada.
However, OPEC+ output cuts are still likely to keep the market in a small deficit in 1QCY24 and the deficit/surplus scenario for CY24 will be contingent on OPEC+ output cut decision for the remaining part of the year, according to the brokerage.
Analysts believe that OPEC+ will continue to use its strong pricing power to support Brent crude price ~$75-80/bbl, which is the fiscal breakeven crude price needed by Saudi Arabia. The pricing power of OPEC+ has strengthened over the past 2-3 years due to the following reasons:
-US oil production continue to be at ~13 mbpd only (vs. pre-Covid peak of ~13.1 mbpd) as US shale investors are disciplined in capital investment.
-OPEC+ having shown strong ability to cut output by ~10 mbpd in early CY20 to offset the ~10 per cent decline in global oil demand post Covid.
OPEC+ still has enough headroom to cut output by another 3-5mmbpd to offset any macro-related risk to global oil demand growth., according to the brokerage.
‘’Despite the recent rally, we maintain ‘buy’ on ONGC (unchanged TP of ₹300) and Oil India (unchanged TP of ₹500) given strong dividend play (of 5-6 per cent) and also because CMP is discounting ~$65/bbl net crude realisation,'' said JM Financials.
‘’…While our TP is based on $70/bbl net crude realisation, and various changes in windfall tax suggesting the government is fine with ONGC/Oil India making net crude realisation of ~$72-73/bbl. Every $5/bbl rise/fall in net crude realisation results in increase/decrease in our EPS and valuation by 6-9 per cent,'' added the brokerage.
Brent crude price of $75-80/bbl is a sweet spot for ONGC/Oil India, as it improves visibility for net crude realisation of $75/bbl by eliminating the risk of ad hoc fuel subsidy burden. At CMP, ONGC trades at 6.4x FY26E EPS and 0.9x FY26E BV and Oil India trades at 8.4x FY26E EPS and 1.1x FY26E BV.
Also Read: India's crude oil output up 0.7% to 2.5 MMT in January, imports rise 5.7% YoY: PPAC
Oil prices steadied on Wednesday, February 21, stabilising from losses in the previous session, as growing expectations that cuts to US interest rates will take longer than thought balanced ongoing concerns over attacks on shipping in the Red Sea.
Brent crude futures fell by 14 cents, or 0.17 per cent, to $82.20 a barrel, while US West Texas Intermediate crude futures (WTI) were lower by nine cents, or 0.12 per cent, at $76.95. The Brent and WTI contracts fell from near three-week highs on Tuesday, dropping by 1.5 per cent and 1.4 per cent, respectively.
The premium of front-month April Brent futures over September contracts - known as backwardation, and a sign of a tightly supplied market - hit its highest since October 31 on Monday at $3.64 a barrel, though has since cooled off to around $3.50, according to news agency Reuters.
Also Read: ONGC Q3 Results: Net profit drops 10% to ₹10,356 crore, revenue down 2% YoY; dividend declared
Crude oil exhibited significant volatility, once again plunging amid concerns over demand and increased US oil inventories. Nevertheless, support emerged from China's five-year prime loan rate cuts and profit-taking in the dollar index, which helped stabilize crude oil prices at lower levels, according to analysts.
‘’The market is exhibiting caution ahead of the release of the FOMC meeting minutes. We anticipate continued volatility in the trading session, with support levels expected at $76.50–75.90 and resistance at $78.10-78.90. In terms of the INR, crude oil has support at ₹6,360-6,290 and resistance at ₹6,510-6,590,'' said Rahul Kalantri, VP Commodities, Mehta Equities Ltd.