Oil and Gas Sector Update : Crude Compass: Signals from the Physical Market Choice Institutional Equities
Developments over the past week:
* US inventories: US crude inventories surged by ~17 million barrels, the largest weekly build since January 2023, driven by a sharp Gulf Coast stock increase as imports rose to multi-month highs while softer exports retained more crude domestically. Cushing inventories also recorded a second consecutive weekly increase.
* China demand & inventories: China is shifting from inventory drawdowns to renewed crude buying after Shandong inventories fell by a record 35 million barrels in July. Refinery throughput is expected is on track to rise over 6% in August as maintenance concludes.
* Saudi oil shipments: Saudi Arabia has increased crude exports via Egypt's SUMED pipeline to ~2.3 mbpd in August, more than double July's ~1.0 mbpd, as it bypasses Red Sea security risks. The rerouting is redirecting more Saudi crude to Europe and the US, while Asian cargoes face longer, costlier voyages around Africa
In our opinion
* As the global product market continues to tighten, European gasoil cracks have climbed to record highs (Exhibit 1). We believe the upcoming refinery maintenance season is likely to further constrain middle-distillate supply, supporting elevated gasoil cracks. This should provide a strong earnings tailwind for CPCL and MRPL. We have BUY rating on both with target prices of INR 1,540/share and INR 215/share, respectively.
* The 400 million barrels of emergency crude released by the IEA in March have largely been absorbed by the market. At the current inventory drawdown rate of ~2.4 mb/d, we estimate that approximately 350 million barrels have already been depleted, highlighting the limited availability of emergency stock buffers to offset any renewed supply disruptions.
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