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Ida: GRM up from lows while Gas and LNG rise further

Hurricane Ida has led to: 1) surge in GRM from lows; 2) surge in US/European gas and LNG prices (other factors at play, too) from already high levels; and 3) modest rise in oil. Reuters’ Singapore GRM is up US$2.2/bbl or 83% vs average levels on 23-26 Aug as 6% of US refining capacity is still shut. WTI and Brent are up US$3.1- 4.3/bbl (5-6%) from pre-hurricane lows as 1.5m b/d (13.3%) of US oil output is still shut.

Henry Hub, TTF, UK NBP and JKM spot LNG are up 13-28% from lows (just 2.6% of US gas output shut). PVC, PE and PP margins were down 1-19% WoW as of 27-Aug (5-41% of capacities shut), but are likely to be up in Sep (data awaited). The GRM recovery may not sustain. We remain most positive on strength in gas/LNG prices, which is positive for ONGC, OIL and GAIL, and negative for GGL.

* 2.6% of US gas, 6% of refining, 13.3% of oil and 5-41% of petrochemical capacity still shut: Hurricane Ida that hit Louisiana on 29-Aug’21 shut Gulf of Mexico (GoM) oil & gas output and refining and petrochemical capacity in the state. As of 6-Sep: 1) 1.53m b/d or 13.3% of US oil (83.9% of GoM) output was still shut vs 1.74m b/d or 15.1% of US (95.7% of GoM) output at peak; 2) 1.8bcf/d or 2.6% of US (80.8% of GoM) output is still shut vs 2.11bcf/d or ~3% of US (94.5% of GoM) output at peak; 3) 1m b/d or 6% of US refining capacity is still shut vs 2.3m b/d or 13% of US refining capacity at peak, and 5) 5.5mmtpa or 14% of ethylene (16% or 6.5mmtpa at peak), 3.3mmtpa or 14% (21% or 5mmtpa) of PE, 41% or 3.4mmtpa of PVC and 0.4mmtpa or 5% (9% or 0.8mmtpa at peak) of PP capacities in US are still shut

* GRM up 83%; may not sustain: Singapore GRM, which averaged US$2.72/bbl in 23-26 Aug’21, is up 83% (US$2.24/bbl) to US$4.96/bbl on 6-Sep’21. Rise in cracks vs average cracks in 23-26 Aug’21 is as follows: 1) fuel oil by US$3.3/bbl; 2) diesel by US$2.8/bbl (at US$6.4/bbl); 3) naphtha by US$2.2/bbl; 4) jet fuel by US$2/bbl; and 5) petrol by US$1.5/bbl. As refineries restart, GRMs are likely correct; soon after the Feb’21 snowstorm all cracks except petrol corrected. Global refined products demand recovery, which would depend on covid cases, is key.

* Gas & LNG up 13-28%; positive for ONGC, OIL and GAIL and negative for GGL: HH and JKM spot LNG prices are up 21-13% (US$0.81-2.12/mmbtu) to US$4.7- 18.5/mmbtu while UK NBP and Dutch TTF prices are up 27-28% (US$4/mmbtu) to US$18.6-18.4/mmbtu. US/European gas and spot LNG prices were at all-time/multiyear high even before Ida. The recent EU gas rise was also driven by low gas supply / disappointing supply guidance by Russia and rise in EU carbon prices. High gas/LNG prices would boost FY23E deepwater and APM gas price of ONGC and OIL, GAIL’s FY22-FY23E gas marketing EBITDA, but hit GGL’s FY22E margin.

* Demand recovery & OPEC+ output hike key to oil: WTI and Brent are up 5-6% despite 1.5m b/d US capacity still being shut. Pace of global oil demand recovery and whether OPEC+ output hikes continue would determine oil price trend.

* Petrochemical margins likely to rise: Indications are capacities may take some time to restart, which may boost margins with gains likely to be most in PVC.

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