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Brent crude price has risen to +USD 90/bbl driven by Saudi Arabia and Russia’s decision to extend their additional 1.3mmbpd voluntary cuts till end-Dec’23; IEA has said that this is likely to push the market into a substantial deficit in 4QCY23. Global oil inventories fell by a sharp 76mmbbl MoM to a 13-month low in Aug’23. IEA has maintained its CY23 global oil demand growth estimate at 2.2mmbpd; however, it has reiterated likely moderation in demand growth from CY24 to 1.0mmbpd. We believe the strong pricing power of OPEC+ will continue to support Brent crude price at ~USD 80/bbl, which is the fiscal break-even crude price for Saudi Arabia. This is a sweet spot for ONGC/Oil India. We maintain BUY on ONGC (TP INR 205) and Oil India (TP INR 315) given strong 6-8% dividend play and also because CMP is discounting ~USD 55-60/bbl net crude realisation. Separately, IEA has reiterated that refining margins will remain strong in the near term; however, we maintain our near-term cautious view on all OMCs given their marketing segment earnings could come under risk if: a) Brent price sustains

* IEA maintains CY23 global oil demand growth estimate at 2.2mmbpd; however, it reiterates likely moderation in demand growth from CY24 to 1.0mmbpd: IEA, in its Sep’23 Oil Market report, has maintained its global oil demand growth estimate for CY23 at 2.2mmbpd (estimated CY23 oil demand at 101.8mmbpd, up ~2.1mmbpd vs. CY19 pre-Covid levels) driven by strong summer air travel, increased oil use in power generation and surging Chinese petchem output. China is likely to account for ~75% of global oil demand growth of ~2.2mmbpd led by rebound in international travel post easing of Covid restrictions and rise in usage as chemical feedstock. IEA has also maintained its global oil demand growth estimate at 1.0mmbpd in CY24 (at 102.8mmbpd) due to abatement of the post-Covid rebound and rise in penetration of electric vehicles, coupled with efficiency measures and macro headwinds after unprecedented monetary tightening. China’s oil demand growth is estimated to moderate to 640kbpd in CY24 (vs. 1.6mmbpd in CY23); however, OECD countries’ oil demand is expected to begin declining structurally with their oil demand expected to fall by 360kbpd in CY24 (after growing by 90kbpd in CY23). (Exhibit 1-2)

* Global oil inventories fall by a sharp 76mmbbl MoM to a 13-month low in Aug’23: Global commercial oil inventory fell by a sharp 76mmbbl MoM or 2.5mmbpd in Aug’23. However, by end-Jul’23, OECD’s commercial oil inventory rose by ~27mmbbl MoM to 2,814mmbbl; however, deficit to the 5-year average inventory levels remains at ~103mmbbl — Exhibit 3.

* OPEC+ output cut by 2.5mmbpd in CY23TD, but that was offset by 1.9mmbpd rise in nonOPEC+ output led by US and Brazil: OPEC+ crude oil production rose 0.1mmbpd MoM in Aug’23 as Iran/Nigeria/Iraq increased production MoM; but it still continues to lag its output target by ~2.6mmbpd. Saudi Arabia (at 9.0mmbpd) and Russia’s output (at 9.5mmbpd) was steady MoM (Exhibit 4-6). OPEC+ output was cut by 2.5mmbpd in CY23TD, led by Saudi Arabia, but that was offset by 1.9mmbpd rise in non-OPEC+ output led by US and Brazil while Iran raised output by 0.6mmbpd. IEA has maintained global oil supply growth estimate at 1.5mmbpd in CY23 (at 101.6mmbpd) with non-OPEC+ supply, led by the US and Brazil, rising by 1.9mmbpd and OPEC+ supply declining by 0.4mmbpd. However, it has raised CY24 global oil supply estimate by 0.2mmbpd to 1.7mmbpd (to 103.3mmbpd).

* Russia’s crude output steady MoM in Aug’23 while exports decline: Russia’s output was largely steady MoM at 9.5mmbpd in Aug’23; however, its oil exports were down 150kbpd MoM at 7.2mmbpd in Aug’23 (and down 570kbpd YoY) with exports to China and India declining to 3.9mmbpd in Aug’23 (from 4.7mmbpd in Apr-May’23) — Exhibit 5. Russia’s export revenue rose USD 1.8bn MoM to USD 17.1bn in Aug’23 (though still down YoY) due to higher crude price and narrowing discount despite lower volume.

* Russian crude discount continues to be at USD 4-5/bbl in May-Jul’23 vs. USD 6-10/bbl earlier: Russia’s share of India’s crude imports remained strong at ~40% in Jul’23 vs. ~20% in Dec’22 and 1-2% pre-Ukraine invasion. However, discount on Russian crude was ~USD 4-5/bbl in May-Jul’23 vs. USD 6-10/bbl earlier — Exhibit 19. Further, press reports earlier highlighted that