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High oil good for OIL/GAIL; may hit GRM/marketing margins

Brent surged to over US$70/bbl as OPEC+ stuck to its Apr’21 output increase plan despite signs of strong global demand recovery. Possible delay in lifting of US sanctions on Iran’s oil exports to as far back as Aug’21 vs end-May-Jun’21 as expected earlier also played a part. As vaccines are rolled out and restrictions eased, IEA estimates global demand in Q4CY21E to be 6.5m b/d higher than in Q1, which appears enough to absorb rise in supply from Iran. Oil demand appears to be sustainably on the mend in major oil markets and OPEC+ firmly in control of supply, which is likely to keep oil price high. High oil price augurs well for OIL and GAIL, but may hit downstream players’ GRM and marketing margin. However, rising Iran and US oil output may see oil correct from higher levels.

Global demand to rise 6.5m b/d in Q4CY21E from Q1 level:

IEA estimates global oil demand to rise by 6.5m b/d from 93.1m b/d in Q1 to 99.6m b/d in Q4CY21E driven by rollout of vaccines in major oil markets, easing of travel restrictions in the US and parts of Europe, and easing of lockdowns in Indian states. S&P Global Platts estimates petroleum product demand to surge by 8.2m b/d in May-Aug’21 from Apr’21 levels with US gasoline demand rise during summer driving season being the main drivers.

OPEC+ going ahead with plan to boost supply by 2.14m b/d during May-Jul’21:

OPEC+ on 1-Jun’21 re-affirmed its Apr’21 decision to raise output by 700k b/d in Jun’21 and 841k b/d (marginally lower than 850k b/d decided in Apr’21) in Jul’21; this output increase includes Saudi Arabia pruning its 1m b/d additional voluntary output cut by 250k b/d in May’21, 350k b/d in Jun’21 and 400k b/d in Jul’21.

Lifting of US sanction on Iran may be delayed:

We estimate global supply deficit at 1.7-2.8m b/d in Q3-Q4CY21E assuming no further output increase by OPEC+ after Jul’21 and without factoring-in any rise in Iran’s output (1.2-1.8m b/d if Iran’s output rises). Talks in Vienna were expected to revive the 2015 nuclear deal leading to US lifting sanctions on Iran’s oil exports before 18-Jun’21 Iran elections. However, Iran has now said it “very much hopes to announce the total revival of the JCPOA (nuclear deal) before the transfer of power (to the new government) in mid-Aug’21”. Russian representative in the Vienna talks has tweeted “nothing is agreed until everything is agreed. We are very close to this stage, but it may take additional time.”

US output at 11-month high in Mar’21;

upside to EIA’s estimates: US oil output was at a 11-month high of 11.18m b/d in Mar’21 and 245k b/d higher than EIA’s estimate. US oil rig count, a lead indicator of output, is up by 187 (109%) from lows in Aug’20 while WTI is at US$60.3/bbl in CY21-TD and US$68.1/bbl now. We therefore see upside to EIA’s output estimates of 11.43-12.33m b/d in Dec’21-Dec’22.

High oil price may boost GAIL & OIL’s EPS by 11-21%;

may hit GRM and marketing margins: Upside to Oil India’s (OIL) FY22E EPS would be 11-21% if Brent is at US$65-70/bbl. Upside to GAIL’s FY22E EPS would be 12% at futures of US$66.5/bbl. High oil price may bring inventory gain but hit auto fuel marketing margin and GRM by hurting LPG, FO and petcoke cracks and boosting fuel cost and losses.

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