Oil & Gas: Government in Elections mode….?

4 Sep 2023 , 10:49 AM

Refinery outages and inventory drawdown etc., are pushing up MS, HSD, and ATF cracks (SG GRM at US$14/bbl, 91% up MoM in August). As the exports from China pick up, some moderation is likely. Oil prices are likely to remain volatile, on the back of supply cuts at a time when demand outlook is not muted. Govt may nudge OMCs to reduce auto fuel prices towards the festive season; such risks are well reflected in their valuations, for which analysts of IIFL Capital Services like them. Others, are good trading opportunities on firm oil. 

Oil & GRMs firm up: 

While the outlook on global oil consumption has not materially altered, supply cuts are implying imbalance in the oil markets for which, prices are holding up. Incremental supplies from US, Venezuela and Iran hold key for the oil prices, as Aramco plans for US$50bn OFS. Refinery outages (planned + forced) are pushing up MS, HSD, FO and ATF cracks — for which, SG GRMs are up 91% MoM (US$14/bbl). Analysts of IIFL Capital Services see these moderating as exports from China pick up. LNG prices are relatively stable (EU storage full). However, incremental supplies and weak demand weigh high on petchem deltas- PE, PP, PVC, PX, PTA, MEG are down by 6%/8%/1%/9%/12%/49% MoM. 

Government in Elections mode? 

Autofuel margins for OMCs have turned negative, as cracks improve; meanwhile, the Govt to contain inflation has cut LPG price and rolled back the import duty on propane. It is quite likely that the autofuel price may be cut, as anticipated. POL consumption is strong — 5% up YTD — driven by HSD, MS and ATF. CNG sales are strong, given the rise in infra penetration and availability of OEM-fitted vehicles. Domestic gas supply is up, driven by RIL; realisations may see moderation from H2FY24 (from US$12.12/mmbtu). 

OMCs well placed for strong Q2: 

OMCs are likely to report strong Q2 leading to further upgrades in FY24 PAT. Their valuations are cheap and we continue to like them, but remain mindful of stocks remaining sensitive to the news flow on price cuts, fears of populist measures, etc. Upstream companies too are cheap, but their earnings are sensitive to underlying oil prices only (no material volume growth), for which analysts of IIFL Capital Services consider these to be at best, trading ideas; as is the case with GAIL.