Oil prices to remain under pressure; likely to be in the range of $60-70 / barrel in the near term

HDFC Institutional Equities’ Research Analyst (Strategy), Amit Kumar, CFA, gives his views on oil & gas sector.

Oil prices continue to hover at below $70 per barrel levels. Do you think the oil price trajectory has permanently come down?

We are expecting oil price to remain under pressure owing to slowing global economic growth, increased trade uncertainty and potential oversupply from OPEC and OPEC alliance countries. We expect oil price to remain between USD60 to USD 70 per barrel in near term.  If there is (i) a production cut by OPEC+ countries or (ii) rise in global geopolitical tensions, then crude oil price can go above USD70 per barrel.

What is your outlook about oil & gas exploration companies, such as ONGC, for the next one year?

 We expect average crude oil price realization for ONGC to be USD 65 per barrel over next one year while blended gas price realization to increase marginally. Furthermore, oil and gas production to ramp up slowly.  The current market price of ONGC is factoring in crude oil price realization of USD71 per barrel. In our view this is unwarranted in the current environment. Thus, we have a REDUCE recommendation on ONGC.

 What is your outlook about oil marketing companies, such as IOL, for the next one year?

View on Oil Marketing Companies (OMC): Gross refinery margins are weak, and we expect it to remain weak owing sectoral headwinds. The discount on Russian crude oil has reduced. Globally, cracks of transportation fuel to remain low due to refinery capacity addition and weak demand in China with increasing EV penetration. Besides, we expect moderation in auto fuel marketing margin in coming quarters. OMCs are investing in expanding petrochemical product basket to support margins. However, this will lead to rise in debt level and large supply of petrochemicals shall put pressure on petrochemical margins which are already suppressed.

On IOCL: Gross refinery and marketing margin will remain soft. Besides, petrochemical segment will see margin pressure owing to supply glut. Thus, we have REDUCE recommendation on IOCL.       

 Oil & Gas stocks are currently trading at an average P/E ratio of around 14. Do you think they are cheap?

 We are negative on upstream companies (ONGC) and OMCs (IOCL, BPCL, HPCL) owing to low realisation and margins, respectively. We prefer city gas companies (CGD) over upstream and OMCs. We like MGL and IGL in CGD space owing to robust volume growth, strong balance sheet, and quasi monopolistic business model. MGL and IGL are trading at 12.6x/15.9x one year forward PE which is below the five-year average PE of 14x/19x respectively.

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Source: HDFC Securities Institutional Equities