A sweet spot for OMCs: Brent at $75-80/bbl to benefit refiners in near-term
The strong pricing power of the Organization of Petroleum Exporting Countries and its allies (OPEC+) will continue to support Brent crude price at $75-80/bbl, which is the fiscal break-even crude price for Saudi Arabia. This is a sweet spot for most oil-marketing companies (OMCs) in India, with Oil India and Oil and Natural Gas Corporation (ONGC) being the top beneficiaries, according to domestic brokerage firm JM Financials.
‘’We maintain ‘Buy’ on ONGC at a target price of ₹205 and Oil India at a target price of ₹315 given strong 6-8 per cent dividend play and also because current market price is discounting ~$55-60/bbl net crude realisation,” said JM Financials.
Brent crude price of $75-80/bbl is a sweet spot for ONGC/Oil India, as it improves visibility for net crude realisation of $75/bbl by eliminating the risk of ad hoc fuel subsidy burden, according to the brokerage.
The International Energy Agency (IEA) expects the refining margins to remain strong in the next few months as refining demand-supply is expected to be in deficit of 1.3 million barrels per day (mmbpd) in 3QCY23 due to demand growth, unplanned refinery outages and limited cushion from inventories.
The Paris-based agency gathering of the 31 mostly industrialised countries and much of the European Union (EU) said that if OPEC+ current targets are maintained, oil inventories could draw by 2.2 million bpd in the third quarter and 1.2 million bpd in the fourth, “with a risk of driving prices still higher”.
‘’However, optimism on OMCs will be contingent on crude sustaining below ~$75-80/bbl and any reductions in diesel/petrol price ahead of the critical election phase in the next nine months,” said JM Financials.
The Reserve Bank of India (RBI) released the minutes of its latest Monetary Policy Committee (MPC) meeting, in which the rate-setting panel’s member Ashima Goyal said that slower global growth is likely to keep a lid on international oil prices. Indian oil majors turned profitable in the summer last year and are showing large profits.
‘’They are in a position to reduce domestic prices. Oil price cuts have a large impact on household inflation expectations,” said MPC member Goyal.
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Updated: 25 Aug 2023, 06:47 PM IST
