Output hike on hold on OPEC+ stalemate; situation fluid
Brent had surged to US$78/bbl as OPEC+ proposal for a monthly output hike of 400k b/d from Aug’21 has been put on hold and lifting of US sanctions on Iran’s exports no longer appears imminent. OPEC+ led by Saudi Arabia linking output hike to extending OPEC+ deal up to Dec’22 without any revision in production baselines demanded by UAE has led to a stalemate. US (bothered by gasoline price rise), Russia (worried about US output rise) and Iraq (worried of a price war) may help break the deadlock to ensure output hike from Aug’21. Output rise may mean Q3-Q4CY21 supply deficit at 1-0.9m b/d vs 1.4-2.5m b/d if there are no hikes. Barring OPEC+ price war like in Mar-Apr’20, Brent is likely to stay over US$70/bbl in FY22E even with output hikes, which augurs well for ONGC, OIL and GAIL.
OPEC+ output hike from Aug’21 on hold; breakthrough possible:
OPEC+ was considering the extension of the OPEC+ deal beyond Apr’22 up to Dec’22 and monthly output hike of 400k b/d from Aug’21 for 14 months until the cuts fully unwind in Sep’22. UAE supported monthly output hike by 400k b/d starting Aug’21 but favoured extension of deal beyond Apr’22 only if its production baseline is revised to Apr’20 (3.84m b/d) level instead of Oct’18 (3.16m b/d). Rest of OPEC+ led by Saudi Arabia linked increase in output from Aug’21 to the extension of the deal (UAE wanted the two to be decoupled) and refused to revise production baselines leading to a stalemate. US, which is worried about high gasoline prices, Russia, about US oil output surge and Iraq, which is worried of a price war among OPEC+, may help break the deadlock and ensure OPEC+ monthly output hikes by 400k b/d from Aug’21.
Restart of Iran oil exports in limbo; US & Iran not on the same page:
Six rounds of talks in Vienna to revive the 2015 nuclear deal have not yet led to an agreement. Iran wants all sanctions imposed by the Trump administration to be removed whereas US is willing to lift only those necessary for revival of the nuclear deal. Iran also wants US to provide assurances that it will not leave the nuclear pact again but US has rejected this condition. We believe Iran will have to give up its maximalist position if it wants nuclear deal to be revived and US lifting sanctions on its oil exports.
Demand back to pre-covid level in Q4CY22E:
IEA estimates global oil demand to recover to pre-covid level of 100.6m b/d only in Q4CY22E while OPEC+ proposal is to unwind production cuts fully by Sep’22.
OPEC+ unity crucial:
OPEC+ unity would be crucial as Iran oil exports may restart and US output is likely to rise sharply. EIA estimates US output rise of 317k b/d in rest of CY21E and 661k b/d in CY22E to 11.49-12.15m b/d in Dec’21-Dec’22. Output rise could be steeper given rise in US oil rig count (a lead indicator of output) by 204 (119%) from lows in Aug’20 and WTI futures at US$72.6-66.8/bbl in H2CY21-CY22E.
Higher oil price may boost GAIL, OIL & ONGC’s FY22-FY23E EPS by 5-14%:
Upside to ONGC FY22-FY23E EPS would be 14-9% and to Oil India’s (OIL) 10-7% at Brent based on futures of US$73-69.3/bbl vs our estimate of US$67.5-65/bbl. Upside to GAIL’s FY22-FY23E EPS would be 9-5% at Brent and Henry hub futures. Higher UK NBP and spot LNG prices based on futures may also boost ONGC-OIL’s FY23E EPS by 10-6% and GAIL’s FY22-FY23E EPS by another 14-0.4%.
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