Given OPEC’s spare capacity at a multiyear high and strong non-OPEC supply growth, we believe the likelihood of OPEC not extending production cuts is increasing.
As such, oil prices will remain within a specific range in the coming months. The IEA recently released its monthly oil report, in which it lowered its estimates for global oil demand growth for CY24 by 140kb/d to 1.1mb/d, even as the demand growth projection for CY25 was raised to 1.2mb/d (from 1.1mb/d in Apr’24).
In 2024, the global oil supply is anticipated to increase by 580kb/d (vs. +770kb/d est. in Apr’24). This increase is attributed to a 1.4mb/d growth in non-OPEC+ output (vs. 1.6mb/d est. in Apr 24).
In Mar’24, global oil inventories increased by 34.6mb (+43.3mb in Feb 24), with oil stored at sea reaching its highest level since the pandemic.In 2024, the global oil supply is anticipated to increase by 580kb/d (vs. +770kb/d est. in Apr’24). This increase is attributed to a 1.4mb/d growth in non-OPEC+ output (vs. 1.6mb/d est. in Apr 24).Conversely, OPEC+ production is expected to decline by 840kb/d (vs. 820kb/d est. in Apr 24), assuming that voluntary cuts are maintained. In Mar’24, global oil inventories increased by 34.6mb (+43.3mb in Feb’ ’24), with oil stored at sea reaching its highest level since the pandemic.The recent weakness in GRMs might be attributable to weaker-than-expected global oil demand growth. Further, the middle distillate markets experienced a spring sell-off, causing the global refining margins to fall to nearly two-year lows.
The IEA expects refinery activity to pick up pace, with annual growth projected to increase from slightly above zero in 1QCY24 to 500kb/d in 2QCY24 and further to 1.8mb/d in 2HCY24.
As such, we foresee a stronger refining GRM environment in 2HCY25.
While key petchem spreads have largely remained flat QoQ, we do believe the petchem segment is bottoming out as capacities globally are coming off sharply and the excess supply situation continues to correct.
We anticipate a recovery as the summer driving season begins in the US (from Jul’24) and oil demand growth improves in 2HFY25. The marketing margins have remained robust, with oil declining to USD83/bbl in May’24YTD.
The current MS and HSD marketing margins are ~INR5/lit each vs. our assumptions of INR3.3/lit each for both MS and HSD.
Gail India: Buy| Target Rs 235| LTP Rs 202| Upside 16%
GAIL anticipates a robust domestic gas demand, projecting gas transmission volumes to reach 132mmscmd by end-FY25 and 142mmscmd by end-FY26.
Substantial improvement in petchem segment’s profitability over 2HFY25- FY26 as new petchem capacity will be operational and low inventories globally will drive re-stocking demand, thus improving spreads.
HPCL: Buy| LTP Rs 557| Target Rs 600| Upside 7%
The commissioning of a bottom upgrade unit at its Visakhapatnam refinery would improve distillate yield by 10% from FY25 onward.
We see the following as key catalysts for the stock include 1) demerger and potential listing of lubricant business, 2) the commissioning of its bottom upgrade unit, and 3) the start of the Rajasthan refinery in 4QFY25. The demerger of the lubricant business also provides a value-unlocking opportunity.
(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)
