Oil upstream - Vaccine hopes drive oil prices up; OPEC+ also does its part - ICICI Securities

Brent is up 34% from lows in end-Oct'20 driven by hope that Covid vaccines would lead to demand recovery. The oil price surge is despite second wave of Covid in Europe and US (which has led to demand recovery reversal), and surge in Libyan oil output from 0.1m b/d to 1.25m b/d. Biden administration lifting US sanctions on Iran oil exports is another risk. US oil rig count is up 40% (69) from lows in mid-Aug'20, which together with high oil prices may drive further recovery in US oil output. OPEC+ deciding to raise output from Jan'21 more modestly than earlier agreed is likely to ensure global supply deficit even in Q1CY21E. Thus, OPEC+ has done its part to prevent supply surplus until vaccine boosts demand. This augurs well for oil prices (positive for GAIL) though risks remain.

- Oil up 34% from lows despite multiple headwinds due to Covid vaccines: Brent is up 34% from US$36.9/bbl on 30-Oct'20 to US$49.5/bbl on 4-Dec'20 driven by hope of oil demand recovery due to announcements of multiple high-efficacy vaccines against Covid. The oil price surge is despite: 1) second wave of Covid in Europe and the US, which has led to demand recovery reversal; 2) surge in Libya's oil output from 0.1m b/d in Jul'20 to 1.25m b/d; 3) risk of Biden administration lifting US sanctions on oil exports by Iran, which would boost Iran's output and global supply; and 4) further rise in US oil output as onshore oil rig count is up by 69 (40%) from mid-Aug lows.

- Demand recovery has reversed in Europe and US due to second Covid wave: Second wave of Covid in Spain has meant that diesel and gasoline consumption decline was steeper at 13.7-15.6% YoY in Oct'20 vs 7.7-6.6% YoY fall in Sep'20. Gasoline consumption in the US was down 9.3-9.9% YoY in Oct-Nov'20 vs 7.1% YoY fall in Sep'20. US distillate consumption recovery also reversed with fall being 6.7% YoY in Oct'20 vs 2.6% YoY in Sep'20, but fall was just 3.3% YoY in Nov'20.

- Recovery in oil prices and onshore oil rig count suggest further rise in US oil output: US oil output was up 841k b/d in Sep'20 at 10.86m b/d from low of 10m b/d in May'20 as per the more reliable EIA monthly data and at 11.1m b/d in the week ended 27-Nov'20 as per the EIA weekly data. US shale output at 7.14m b/d was up 955k b/d in Sep'20 from low of 6.19m b/d in Apr. US shale and total output are still 1.1-2m b/d below peak level respectively. US oil onshore rig count, which is a lead indicator of US oil output, was up by 69 (40%) from low in mid-Aug. The recent oil price surge, even if it does not sustain, would allow producers to hedge at higher prices and boost output.

- Supply deficit likely even in Q1CY21E as OPEC+ now plans more modest output rise from Jan'21 than earlier agreed: IEA estimates global oil supply deficit at 2.1-2.8m b/d in Q3-Q4CY20E. However, surplus of 0.4m b/d was likely in Q1CY21E if OPEC+, as agreed in Apr'20, was to prune output cuts from 7.7m b/d to 5.8m b/d from Jan'21. However, we now estimate supply deficit of 0.5m b/d in Q1CY21E and 0.2- 2.8m b/d in Q2-Q4CY21E as OPEC+ has decided to raise output by just 0.5m b/d in Jan'21 and by not more than 0.5m b/d in later months and only after deliberations.

Source : Equity Bulls

Keywords