Oil And Gas Sector Check - Upstream: A Multi-Year Upcycle Underway: Motilal Oswal

Motilal Oswal Report

Key commodity trends in the next 12-18 months:

1. we expect high oil prices ($80-100/barrel of oil) to continue for much of CY24 due to resilient demand growth (CY24: 0.9 million barrels of oil per day; International Energy Agency) amid sufficient new supply (CY24: 1.6 mnbopd, IEA) but prone to delays;

2. gas prices are projected to remain moderate globally, as inventories in the U.S. and Europe are higher than expected;

3. refining margins are anticipated to sustain at or slightly above mid-cycle level (Singapore gross refining margin LT average: $6/bbl) as net capacity additions (CY24: 0.6 mnbopd) lag oil demand growth; and

4. petchem spreads would improve from here on as CY23 marked the peak year of new olefin capacity addition during 2020-24.

Reliance Industries Ltd., Oil and Natural Gas Corporation Ltd., Oil India Ltd., GAIL India Ltd. and Indian Oil Corporation Ltd. – our preferred stocks:

We are factoring in strong oil sales realizations($73/bbl after accounting for the impact of windfall tax) for ONGC/Oil India.

Additionally, moderate spot liquefied natural gas prices are expected to have a positive effect on Gujarat Gas Ltd. (which has a 35% spot exposure in its sourcing mix), Petronet LNG Ltd., and GAIL's transmission business.

Oil marketing companies’ refining margin, we believe, can continue to remain strong, aided by a tight-demand supply situation and Russian crude discounts.

However, we see potential for a setback on the marketing margin side due to retail price cuts for motor spirit/high speed diesel. For city gas distribution companies, we believe that Ebitda/standard cubic metre margins may have peaked and the benefits of lower gas prices may need to be passed on to the consumers.

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