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Brent crude price has been capped in recent months due to demand concerns amidst macro uncertainty. IEA, for the first time, cut its CY23 global oil demand growth estimate, by 0.2mmbpd to 2.2mmbpd due to macro uncertainty, and expects demand growth to moderate to 1.1mmbpd from CY24 as the post-Covid rebound abates and penetration of electric vehicles rises. Global oil inventories also rose 19mmbbl MoM in May’23 to its highest since Sep’21, driven by 44mmbbl rise in non-OECD inventory led by China. However, OPEC+ output cuts, led by additional voluntary cuts by Saudi Arabia and Russia, are likely to push the oil market into deficit in 2HCY23. We believe OPEC+ will continue to support Brent crude price at ~USD 75-80/bbl, which is the fiscal break-even crude price for Saudi Arabia. The pricing power of OPEC+ has strengthened due to muted growth in US crude output; OPEC+ has, in the past, also showed strong ability to cut output (as seen in CY20, when it slashed production by ~10mmbpd to offset the collapse in demand post Covid). Hence, the new normal for Brent crude price could be ~USD 75-80/bbl (except in the event of a global macro shock). That price is a sweet spot for ONGC/Oil India. We maintain BUY on ONGC (TP INR 200) and Oil India (TP INR 315) given strong dividend play and also because CMP is discounting ~USD 55-60/bbl net crude realisation. However, optimism on OMCs will be contingent on crude sustaining below ~USD 75-80/bbl and duration for which OMCs are allowed to earn above-normal marketing margin.

* IEA cuts CY23 global oil demand growth estimate by 0.2mmbpd to 2.2mmbpd due to macro uncertainty; expects demand growth to moderate from CY24: IEA, in its Jul’23 Oil Market report, has for the first time cut global oil demand growth estimate for CY23, by 0.2mmbpd to 2.2mmbpd (estimated CY23 oil demand at 102.1mmbpd, up ~2.4mmbpd vs. CY19 pre-Covid levels) due to significant macro headwinds. China is likely to account for ~70% of global oil demand growth of ~2.2mmbpd led by rebound in international travel and rise in usage as chemical feedstock. Further, IEA expects global oil demand growth to moderate to 1.1mmbpd in CY24 (estimated demand at 103.2mmbpd) driven by 1.4mmbpd growth in non-OECD demand (while OECD demand likely to decline 0.3mmbpd) as the post-Covid rebound abates and penetration of electric vehicles rises, coupled with efficiency measures and macro headwinds after unprecedented monetary tightening.

* Global oil inventories up 19mmbbl MoM in May’23 to highest since Sep’21, driven by 44mmbbl rise in non-OECD inventory led by China: By end-May’23, OECD’s commercial oil inventory declined by ~2mmbbl MoM to ~2,800mmbbl; deficit to the 5-year average inventory levels remains at ~40mmbbl — Exhibit 3. However, a substantial 44mmbbl build in non-OECD countries’ inventories, led by China, pushed global observed oil inventories up by 19mmbbl MoM in May’23 to the highest since Sep’21. China posted its largest monthly increase (a steep 1.1mmbpd) in crude stocks in Jun’23 driven by a sharp rise in crude oil imports, including heavily discounted Russian and Iranian crude

* Global oil supply rose by 480kbpd MoM in Jun’23 while OPEC+ output was unchanged; OPEC+ output is still 1.5mmbpd below target: Global oil supply rose by 480kbpd MoM to 101.8mmbpd in Jun’23 led by non-OPEC+ countries, with OPEC+ output unchanged MoM at 43.4mmbpd. OPEC’s Jun’23 output was also unchanged MoM at 28.7mmbpd as higher supply from Nigeria (up 60kbpd to 1.24mmbpd) and Iraq (up 50kbpd to 4.17mmbpd) was offset by slight declines elsewhere while Saudi Arabia’s output was steady at 9.98mmbpd; output from Iran was also steady at 3.01mmbpd (though up 0.6mmbpd in the last few months). Russia’s output was steady MoM at 9.85mmbpd. OPEC+ output is still ~1.5mmbpd below its target. (Exhibit 4-5). IEA has raised global oil supply growth estimate by 0.2mmbpd to 1.6mmbpd in CY23 (at 101.5mmbpd) with non-OPEC+ supply, led by the US and Brazil, rising by 1.9mmbpd and OPEC+ supply declining by 0.3mmbpd. Further, IEA expects CY24 global oil supply to rise by 1.2mmbpd (to 102.8mmbpd) with non-OPEC+ supply accounting for the entire increase.

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