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Demand remains soft; elevated supply-side risks in CY25

* IEA released its monthly oil market report on 11th Jul’24 and re-iterated that: 1) the oil demand outlook remains soft at ~1mb/d in CY24/CY25; and 2) oil supply is set to rise by 1.8mb/d in CY25. In the near term, IEA expects oil supply to rise by 770kb/d QoQ in 3QCY24 (vs. QoQ rise of 910kb/d in 2QCY24). Further, OPEC+ is set to meet on 01st Aug’24 to review global oil market conditions and production levels. We are building in oil prices of USD75/bbl in FY26, but we believe risks to a lower oil price curve continue to rise given the strong non-OPEC supply response in CY25 and beyond.

* Demand estimate upgraded marginally, but still soft overall: IEA increased its global oil demand estimate for CY24 by about 40kb/d to 1mb/d. It maintained the demand projection for CY25 at 1mb/d. According to IEA, global oil demand growth continues to slow down, with an increase of 710kb/d YoY in 2QCY24, marking the slowest quarterly rise since 4QCY22.The persistent weakness in oil demand, as per IEA, is driven by a contraction in Chinese consumption, an expanding EV fleet and an increase in vehicle efficiency. Demand for industrial fuels and petrochemical feedstocks was especially poor.

* Non-OPEC supply remains robust: For CY24, IEA expects the global oil supply to increase by 770kb/d (vs. 690kb/d rise estimated previously). This increase is attributed to 1.5mb/d growth in non-OPEC+ output (vs. 1.4kb/d est. in Jun’24). OPEC+ production is projected to fall by 740kb/d (in line with Jun’24 est.). In CY25, global supply is estimated to rise by 1.8md/d (in line with Jun’24 est.), as non-OPEC+ output is expected to rise by 1.5mb/d (in line with Jun’24 est.).

* Inventories continue to rise: In May’24, global oil inventories increased by 23.9mb (increase by 19.3mb in Mar’24), with oil stored at sea decreasing by 17.3mb. Conversely, onshore stocks increased by 41.3mb. Total OECD stocks rose by 27.8md to 2,845mb, but remained 69mb below the five-year average. Preliminary data suggests that global oil stocks fell by 18.1mb in Jun’24, primarily driven by crude oil, while product inventories increased.

* In CY25, risk to oil price from rising supply; prefer OMCs: We note that, as per IEA, CY25 oil demand growth is estimated at 1mb/d, while global oil supply growth is estimated at 1.8mb/d. With OPEC+ looking to unwind spare production capacity, we see some risk to net realizations of USD73-74/bbl for upstream companies in CY25. We think that the best way to play in a rangebound oil price environment with rising downside risks is oil marketing companies (OMCs).

* HPCL (BUY): HPCL remains our preferred pick among the three OMCs. We see the following as key catalysts for the stock: 1) demerger and potential listing of lubricant business, 2) the commissioning of its bottom upgrade unit, and 3) the start of Rajasthan refinery in 4QFY25. We reiterate our BUY rating on the stock with a TP of INR390 (based on 1.4x FY26E P/B).

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