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Motilal Oswal Report
The conflict intensifies:
The clash between Iran and Israel escalated significantly over the weekend, as Iran launched drone and rocket attacks on Israel. This conflict has, in turn, led to the expectation that crude oil, refining gross refining margins, and spot LNG prices could scale new highs in the near term.
While our base case scenario remains that de-escalation efforts will likely control the crisis, in this note, we examine the implications for commodities and stocks if the crisis escalates further.
The Strait of Hormuz remains critical for oil, refined products, and LNG:
About 15/6 million barrel of oil per day of crude oil/refined products flow through the SoH (i.e., 15% and 8% of global crude and refined product consumption, respectively), which Iran has threatened to block.
Further, we note that ~20% of the global LNG trade moves via SoH, including almost all LNG exports from Qatar and the UAE.
Three key implications in the event of SoH blockade:
if Iran successfully enforces a complete or partial blockade of the SoH, we anticipate materially higher crude oil prices, refining GRM, and spot LNG prices;
while alternative routes do exist, they may only be able to accommodate a fraction (~7-8 mnbopd of crude oil/refined products) of the volume currently passing through the SoH (~21 mnbopd), and that too at elevated freight costs;
while investors focus on oil, we believe that spot LNG prices will witness even sharper escalation if the SoH is closed due to the absence of alternative routes.
Headwinds for OMCs/CGDs; outlook mixed for GAIL
Overall, we see elevated crude/refined product prices as negative for integrated margins of oil marketing companies (HPCL>BPCL>IOCL). Every Rs 1 change in gross marketing margin impacts consolidated Ebitda of HPCL/BPCL/IOCL by 25%/22%/23% for FY25.
High spot LNG prices could potentially dent the volume and margin outlook for gas utilities (GAIL/ Petronet LNG) and the CGD sector (Gujarat Gas, Indraprastha Gas, Mahanagar Gas) respectively.
Reliance Industries could be a beneficiary of elevated GRMs, while high crude prices bring limited earnings surprises for ONGC and Oil India, given their net realization remains capped at ~$75/barrel of oil.
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