Oil stocks show mix reactions to OPEC+ production cut; HPCL, BPCL down 4-5%.

Crude Oil

When the Organization of the Petroleum Exporting Countries (OPEC) reduced production for the current year, oil stocks generally traded in a mixed manner on Monday. OMCs like HPCL and BPCL suffered a severe blow and saw a 4-5% decline. RIL, a powerhouse, as well as Adani Group’s Adani Total Gas, were under pressure. Top gainers, though, were ONGC and Petronet LNG. The cost of crude oil has also skyrocketed. Investors are wary as the oil market is expected to become tighter in the future.

As of this writing, the BSE Oil & Gas index was trading at 17,257.24, down 126.16 points or 0.73%. Indicator was close to day low of 17,230.93.

The worst performer was HPCL, which lost about 5% of its value, followed by BPCL, which lost 4.2%. Adani Total Gas and Indraprastha Gas had declines of 2.9% and 2.08%, respectively. Reliance Industries was slightly lower, while Indian Oil fell by around a half of one percent.

Petronet LNG, one of the gainers, claimed the lead with a gain of 2.2%. ONGC increased 1.8%. While GAIL and Gujarat Gas are slightly up.

After the OPEC+ output cut, crude oil prices increased on Monday. After the OPEC+ output cut, crude oil prices increased on Monday. Although US WTI soared by over 5% to trade at $79.6 per barrel, Brent crude soared by over 4% and was trading close to $81.23 per barrel.

Speaking about the sharp increase in crude oil prices, Ravindra V. Rao, CMT, EPAT, VP-Head Commodity Research, Kotak Securities said on Monday that WTI Crude oil futures showed a fantastic recovery over the past week and closed at $75.67 per bbl, up by 9.25%, due to a weaker dollar, the possibility of supply disruptions from Iraq, and improved risk sentiments amid eased banking sector fears. Following news that US authorities are considering increasing an emergency loan facility for banks, risk sentiments improved. After Iraq won a protracted international arbitration lawsuit, oil exports from the semi-autonomous Kurdistan region through Turkey ceased, disrupting 0.5 percent of the world’s supply.

Moreover, Rao noted that on Sunday, OPEC+ oil members unexpectedly announced voluntary production cutbacks totaling about 1 mbpd, beginning in May and lasting until 2023. The cartel’s action could raise oil prices because it comes at a time when Chinese demand is anticipated to increase.

The output of OPEC+ and rising crude prices are probably not in the Indian oil marketing corporations’ favour!

Kotak Institutional Equities analysts stated in their most recent analysis dated April 3 that a number of OPEC+ countries, led by Saudi Arabia, have announced voluntary cutbacks from May 2023 to end-2023 of about 1.1mb/d. This could reach close to 1.6mb/d when the 500kb/d cut that Russia recently announced is included. The current cut may result in a substantially higher production decrease, as opposed to OPEC+ output declining only by about 0.5 mb/d from the announced 2 mb/d cut in November 2022.

The cuts “reinforce our forecast of tightening oil markets in 2HCY23, and likely increased oil prices are adverse to India as a whole, and notably to OMCs,” according to Kotak’s letter.

The brokerage noticed that although OPEC+ had promised a 2 MB/d production drop starting in November 2022, the production really decreased by only 500 KB/d. Numerous nations were already producing below-target levels, and a reduction was not anticipated. Although countries who were generating at levels above the aim had reduced their production by around 1.2 mb/day, this was offset by almost 700 kb/d more production from nations that were producing at levels below the target (such as Nigeria, Kazakhstan, and Russia).

“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,” the brokerage said in reference to OMCs. “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.”

The downstream oil marketing companies (OMCs) may see under-recoveries on gasoline, diesel, and LPG if oil prices increase to over $90 per barrel, according to Kotak, because we don’t think OMCs will have pricing independence until at least the general elections of 2024. Higher oil prices won’t be beneficial for upstream businesses because windfall taxes only allow them to realise roughly $75 per barrel of oil.

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