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Oil upstream - Oil out of the woods, but headwinds to further rise - ICICI Securities

Posted On: 2020-10-16 00:27:05

Oil, after a sharp recovery from lows in Apr'20, is down 9% from highs in Aug'20 due to seasonal demand weakness and ramp up in Libyan oil output. Oil appears out of the woods given demand is exceeding supply probably from Jun'20 and strengthening of demand recovery in India and the US in Sep after a reversal in Aug. Libya's oil output rise, low demand from refiners due to weak GRMs and lockdowns are headwinds to further oil price rise. US lifting sanctions on Iran oil exports if Biden wins is another risk. However, OPEC+ can delay pruning of output cuts or deepen cuts to counter any demand recovery reversal or supply rise from Iran. Strong demand recovery and sanctions continuing to cap Iran volumes may see Brent at US$50/bbl in H2CY21, which is positive for ONGC.

- Oil price down 9% from highs in end-Aug'20: Brent recovered from the low of US$17.3/bbl on 21-Apr'20 to US$45.6/bbl on 25-Aug'20 driven by recovery in global demand from lows of Apr'20 and OPEC+ output cuts since May'20. However, Brent at US$41.3/bbl now is 9% below 25-Aug high. Oil price correction is due to seasonally weak demand (demand in Sep tends to be weak) and Libyan oil output recovery after ceasefire among the warring factions.

- Demand exceeding supply from Jun'20: EIA estimates global oil demand has exceeded supply since Jun'20 with global supply deficit at 1.7-3.6m b/d in Jun-Sep'20 vs supply surplus of 19.5m b/d in Apr'20; supply in Sep'20 was 8.6mb/d below Apr'20 levels, while demand recovery was 14.4m b/d as per EIA. IEA also estimates global oil supply deficit at 2.3-4.1m b/d in Q3-Q4CY20. Consumption continues to recover with that in US down 11.6% YoY, India down 4.4% YoY, China up 0.1% YoY in Sep'20 and Total SA's retail fuel sales in Europe almost back to year-ago levels; demand recovery in India, US and Spain had reversed in Aug but is back on track in Sep.

- Headwinds to further oil price rise: Headwinds to further oil price rise are: 1) Rise in Libyan output from 0.3m b/d now (0.2m b/d in CY21-TD) to 0.6m b/d as its largest field ramps up and to over 1m b/d in H1CY21E; 2) weak GRMs (though at 6-8 month highs across regions in Oct-TD), which may mean low demand for oil from refiners; 3) lockdowns due to rising covid-19 infections hurting demand; and 3) US lifting sanctions on oil exports by Iran if Biden becomes the next US president.

- Oil appears out of the woods: We believe oil is out of the woods with demand recovering from Apr'20 lows, output down from peak and demand exceeding supply from Jun'20. IEA estimates global oil demand to rise by 5.5m b/d YoY but supply rise is estimated at only 2m b/d YoY in CY21E assuming OPEC+ prunes cuts to 5.8m b/d from Jan'21 and Libyan output ramps up; thus, supply deficit of 1.2m b/d is estimated in CY21E vs surplus of 2.2m b/d in CY20E. Global oil supply deficit is estimated at 0.2-2.5m b/d in Q1-Q4CY21. Demand recovery reversal due to rising infections and/or Iran's supply rise are risks to oil price but to counter these risks OPEC+ can delay pruning of production cuts from 7.7m b/d to 5.8m b/d to a later date or deepen cuts.

Source: Equity Bulls

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