Crude prices defy China’s demand dip, Indian market braces for impact: ICICI Report, ET EnergyWorld

New Delhi: A recent report by the Energy Information Administration (EIA) has indicated that crude prices may continue their upward trajectory, with declining crude and gasoline inventories in the past weeks, according to ICICI Securities.

These declines come in spite of healthy distillate inventories. The market appears to be factoring in an estimated 300 million barrel shortage in the Strategic Petroleum Reserves (SPR) and consistent production cuts from Saudi Arabia and Russia, effectively offsetting weakened demand from China. ICICI Securities has adjusted their FY24/25E crude price projections to USD 87/90 per barrel, up from a previous USD 85.

Recent OECD oil inventory data shows levels trailing behind historical averages. Meanwhile, a surge in crude demand, implied through product demand, is projected to set a record for CY23E. This demand growth, largely driven by diesel, is slated to increase by approximately 2.2mb/d.

Furthermore, over 200 million barrels of oil that were extracted from the SPR by the U.S. last year to stabilize demand and prices remain unreplaced, heightening the possibility of future price hikes. Over the past six months, futures prices have consistently shown an uptrend.

OPEC+’s decision to maintain their supply cuts, with Saudi Arabia cutting around 1mb/d and Russia 0.3mb/d, is tightening global oil supplies. Given the latest demand estimates from IEA and OPEC, a potential supply deficit ranging from 0.7-1.2 mb/d for CY23 and 1.6-3.0m/b for CY24 is on the horizon. This projected deficit doesn’t consider the SPR refill, which in itself could escalate global crude requirements.

China’s forecasted demand growth of 1.4mb/d has also been factored into these estimates. A downward revision of China’s demand could mitigate the deficit, but irrespective of the China outcome, a significant supply deficit for global crude markets is anticipated based on IEA or OPEC estimates. A complete reversal of Saudi and Russian production cutbacks from the past 12-18 months would be required to address this deficit.

Consistently high oil prices pose challenges for the Indian Oil & Gas sector. The government has capped upstream net realisations at USD 75/bbl levels, negating any incentive for upstream companies. The fixed pricing for petrol and diesel since April 2022 suggests potential downside risks for the earnings of Oil Marketing Companies (OMCs) for the remainder of FY24E.

In the context of gas companies, while Spot LNG prices offer some comfort, a USD 10/bbl surge in crude translates to a USD 1.3/MMBtu increase in Term LNG prices. However, strengthening GRMs, marked by a USD 4-5/bbl increase, could alleviate some of the pricing pressures.

  • Published On Sep 21, 2023 at 05:29 PM IST

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