IGI Logo

OPEC+ blinks but crude likely to be supported ~USD70/bbl; Buy ONGC/Oil India

Brent has weakened to ~USD 71/bbl as OPEC+ agreed to continue with their earlier announced plan to gradually reverse voluntary output cut of 2.2mmbpd over Apr’25-Sep’26, implying monthly incremental production run-rate of ~138kbpd. OPEC+ attributed output hike to positive market outlook while we believe it could be primarily due to the US President’s push for lower oil prices (while press attributed this to Kazakhstan continuous over-production); however, OPEC+ also said that the hike may be paused or reversed subject to market conditions. OPEC+ output hike is negative for crude price as this hike is likely to add to the surplus in global oil demand-supply of ~0.5mmbpd in CY25 (vs marginal deficit in CY24). However, we expect Brent to stabilise ~USD 70/bbl as otherwise it could hurt US shale oil capex and lead to steep rise in Saudi Arabia’s fiscal deficit. Hence, we have lowered our Brent price assumption to USD 70/bbl (from USD 75/bbl) for FY26 and FY27, resulting in 7-9% cut in ONGC/Oil India FY26 and FY27 PAT estimate and TP; however, we maintain BUY on ONGC/Oil India given robust ~12%/25% production growth outlook in the next 1-3 years, and our expectation of Brent likely to be supported ~USD 70/bbl (while CMP is discounting ~USD 55-60/bbl of net crude realisation); Oil India also benefits from NRL capacity expansion. We maintain our cautious view on OMCs though risk-reward is more balanced now after recent share price correction and fall in oil prices.

* Brent down to ~USD 71/bbl as OPEC+ agrees to gradually reverse voluntary output cut of 2.2mmbpd over Apr’25-Sep’26: Brent declined by ~3% to ~USD71/bbl as OPEC+ agreed (link to OPEC+ press release) to continue with their earlier announced plan to gradually reverse voluntary output cut of 2.2mmbpd in 18 months from 1st Apr'25 till end Sep'26, implying monthly incremental production run-rate of ~138kbpd (including 300kbpd output hike by UAE) – this is as per OPEC+ Dec’24 announcement (Exhibit 8). OPEC+ attributed this output hike decision to healthy market fundamentals and positive market outlook but said it will remain adaptable to evolving conditions and this gradual increase may be paused or reversed subject to market conditions to support oil market stability. Reuters reported based on sources that OPEC+ output hike was partly as Saudi Arabia and other OPEC+ countries were angry with continuous rise in output from Kazakhstan above its output target (with Feb’25 output at 1.83mmbpd vs target of 1.47mmbpd); however, OPEC+ reiterated the pledges made by overproducing countries (primarily Kazakhstan, Iraq and Russia) to achieve full conformity and compensate for overproduced volumes until end of Jun’26. However, we believe OPEC+ output hike could be primarily due to US President Trump’s push to Saudi Arabia and OPEC+ to lower oil prices (to help end Ukraine war). Please note OPEC+ current output cut is 5.85mmbpd comprising of: a) 2.0mmbpd of official output cut by all OPEC+ countries – this cut is till end CY26; b) 1.65mmbpd of 1st stage of voluntary cuts by 8 OPEC+ members (Algeria, Iraq, Kazakhstan, Kuwait, Oman, Russia, Saudi and UAE) – this cut is also till end CY26; and c) 2.2mmbpd of 2nd stage voluntary cut by 8 OPEC+ members (same as above), which OPEC+ has agreed to reverse from Apr’25 till Sep’26 — Exhibit 6-7

* OPEC+ output hike to add to ~0.5mmbpd of surplus in CY25; but Brent likely to stabilise ~USD 70/bbl as otherwise it could hurt US shale oil capex and lead to steep rise in Saudi Arabia’s fiscal deficit: OPEC+ output hike is negative for crude price as this hike is likely to add to the surplus in global oil demand-supply of ~0.5mmbpd in CY25 (led by 1.6mmbpd growth from non-OPEC+ while demand growth is expected to be 1.1mmbpd); this compares to marginal deficit in CY24 and ~0.4mmbpd deficit in CY23 as OPEC+ output cut had offset non-OPEC+ oil supply growth – Exhibit 1-3. Hence, OECD industry oil inventory at ~2,744mmbl at end Dec’24 was ~100mmbbl below last 5 year average (Exhibit 4); however, inventory level could rise to above 5 year average in CY25 as we move from a deficit to a surplus scenario. However, we believe Brent crude price is unlikely to fall significantly below ~USD 70/bbl as it could hurt US shale oil capex; US President is also likely to prefer ~USD 70/bbl oil price which takes care of US consumer interest but also protects US oil companies’ interest as well. Further, any sharp fall in oil price below USD 70/bbl may lead to reversal in OPEC+ output hike decision as it will otherwise deepen Saudi Arabia’s fiscal deficit given its fiscal break-even crude price is ~USD 85/bbl (as per IMF — Exhibit 9). Separately, oil market will look for clarity on whether US Trump administration can: a) boost US domestic oil & gas production – we don’t see significant rise in US crude output as investors in US shale companies have been pushing management for more dividend pay-out and to focus on RoCE post Covid vis-àvis pre-Covid focus on higher capex and volume growth; b) end Russia-Ukraine war and ease sanctions on Russian oil; and c) tighten sanctions on Iran and Venezuela.

* We lower our Brent assumption to USD 70/bbl (from USD 75/bbl) for FY26 and FY27; however, maintain BUY on ONGC/Oil India: Given OPEC+ output hike is likely to add to oil demand supply surplus in CY25, we have lowered Brent price assumption to USD 70/bbl for FY26 and FY27 (from USD 75/bbl earlier). This has led to cut in our FY26 and FY27 PAT estimate by ~7% for ONGC and 8-9% for Oil India; also this has led to cut in our TP to INR 290 for ONGC (from INR 315) and to INR 500 for Oil India (from INR 545) — Exhibit 26. However, we maintain BUY on ONGC and Oil India given robust production growth outlook in the next 1-3 years (~12% for ONGC and ~25% for Oil India) and our expectation of Brent likely to be supported ~USD 70/bbl (while CMP is discounting USD 55-60/bbl of net crude realisation). Further, Oil India’s earnings growth is likely to be aided by expansion of the NRL refinery from 3mmtpa to 9mmtpa by Dec’25 given the management guidance of excise duty benefits continuing for the expanded capacity as well. However, ONGC/Oil India's earnings will be negatively impacted if Brent crude price declines significantly below USD 70/bbl with every USD 5/bbl decline in net crude realisation, resulting in a decline in our FY26 EPS and valuation by 8-12%. At CMP, ONGC trades at 5.1x FY27E consolidated EPS and 0.7x FY27E BV and Oil India trades at 5.6x FY27E consolidated EPS and 0.9x FY27E BV. (Exhibit 36-46)

* Maintain our cautious view on OMCs though risk-reward is more balanced now after recent share price correction and fall in oil prices: We have reduced OMCs GRM by ~USD 1/bbl as we build in risk of sharp moderation in Russian crude discount benefit for refiners (as US sanctions on Russian vessels is likely to lead to sharp decline in India’s crude imports from Russia; further Russian crude discount has narrowed to USD 1-1.5/bbl in 4QFY25TD from ~USD3/bbl in 9MFY25 as per OMCs management) and also due to moderation in gasoline and other products cracks (excluding diesel crack which is still inline with historical average at ~USD 15/bbl aided by robust demand due to cold winter and high spot LNG prices). However, to offset weak GRM assumption (given OMCs management and Oil Ministry have been indicating they focus on integrated refining and marketing margin) we have raised OMCs auto-fuel marketing margin to INR 4.2/ltr from INR 3.5/ltr assuming NIL LPG losses (or ~INR 6.9/ltr assuming continued LPG loss of ~INR 400bn or ~INR 2.7/ltr of auto-fuel volume). This has led to 1-2% cut to HPCL/BPCL/IOCL FY26/FY27 EBITDA; though FY25 EBITDA has seen sharp revision due to delayed LPG compensation. Hence, our TP has been revised to INR 295 for BPCL (from INR 305) and INR 125 for IOCL (from INR 130) while HPCL TP of INR 320 remains unchanged — Exhibit 26. Though OMCs risk-reward is more balanced now after recent share price correction and fall in oil prices, we continue to maintain our cautious stance on OMCs: a) we believe OMCs’ integrated refining cum marketing margin will normalise around historical levels as government may retain benefit of any sustained fall in crude price via excise duty hike and/or fuel price cuts; and b) OMCs’ aggressive capex plans accentuate our key structural concern as many of the projects fail to create long-term value for shareholders. At CMP: a) HPCL at 1.1x FY27 P/B (vs. historical average of 1.0x); b) BPCL is trading at 1.1x FY27 P/B (vs. average of 1.4x); and c) IOCL is trading at 0.8x FY27 P/B (vs. average of 0.9x). Hence, we maintain our SELL rating on HPCL and IOCL and our HOLD rating on BPCL – Exhibit 47-71

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361