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Oil fundamentals to be under pressure in CY25

* Demand estimate downgraded further: IEA lowered its global oil demand estimate for CY24 by 100kb/d to 960kb/d. It also lowered demand projection for CY25 to 1mb/d (vs 1.2mb/d previously). The persistent weakness in oil demand, as per IEA, is driven by low demand in the key oil markets such as OECD countries, dull economic growth, an expanding EV fleet and an increase in vehicle efficiency.

* Non-OPEC supply remains robust: For CY24, IEA expects the global oil supply to increase by 690kb/d (vs. 580kb/d rise estimated previously). This increase is attributed to a 1.4mb/d growth in non-OPEC+ output (in line with May’24 est.), while OPEC+ production is projected to decline by 740kb/d (vs. 840kb/d est. in May’24). In CY25, global supply is estimated to rise by 1.8md/d (in line with May’24 est.), as non-OPEC+ output is expected to rise by 1.5mb/d (1.4mb/d est. in May’24).

* Inventories continue to rise: In Apr’24, global oil inventories increased by 19.3mb (increase by 34.6mb in Mar’24), with oil stored at sea decreasing by 64.2mb. Conversely, onshore stocks increased by 83.5mb. Total OECD stocks rose by 32.1mb, the first monthly increase since Oct’23. Preliminary data suggests that global oil stocks continued to rise in May’24.

* US EIA lowers CY24 oil price forecast by 5%: Brent crude oil spot price forecast for CY24 was revised down by 5% to USD84/bbl from May’24 forecast of USD88/bbl. CY25 forecast remains unchanged at USD85/bbl. US crude oil production forecast remains unchanged for CY24 and CY25 at 13.2mb/d and 13.7mb/d, respectively. The increase in production forecast (+4% YoY) is led by Permian region, Eagle Ford region and the Federal Gulf of Mexico.

* US EIA raises HH gas price forecast: CY24 forecast for natural gas price at Henry Hub was revised up by 14%, in comparison to May’24 forecasts, to USD2.5/mmbtu. CY25 forecast was revised up by 3%, in comparison to May’24 forecasts, to USD3.2/mmbtu. US liquefied natural gas gross exports forecast remains unchanged for CY24 and CY25 at 12bcf/d and 14bcf/d, respectively.

* In CY25, risk to oil price from rising supply; Buy OMCs: We note that as per IEA, CY25 oil demand growth is estimated at 1mb/d, while global oil supply growth is estimated at 1.8mb/d. With OPEC+ is looking to unwind spare production capacity, we see some risk to net realizations of USD73-74/bbl for upstream companies in CY25. We think that the best way to play in a range-bound oil price environment with rising downside risks is oil marketing companies, where HPCL is our preferred pick.

* HPCL (BUY): HPCL remains our preferred pick among the three OMCs. We see the following as key catalysts for the stock: 1) demerger and potential listing of lubricant business, 2) the commissioning of its bottom upgrade unit, and 3) the start of Rajasthan refinery in 4QFY25. We reiterate our BUY rating on the stock, valuing it at 1.4x FY26E P/BV to arrive at our TP of INR600.

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