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OPEC+ faces what to do about lower oil prices; drivers cheer

OPEC and allied oil-producing countries are weighing how much crude to ship to a troubled global economy as recession fears have sent prices far down from summertime peaks. And that is a concern for producers like Saudi Arabia and Russia, whose state coffers benefited from oil prices that peaked in June at over USD 120 per barrel, but a blessing for US drivers who have seen pump prices fall along with the cost of crude.

US oil traded at around USD 89 per barrel on Monday, while international benchmark Brent traded around USD 95.50. The alliance of OPEC members led by Saudi Arabia and non-members including Russia is determining production levels for October after deciding August 3 on only a token 100,000 barrel per day increase for September.

Analysts say Monday’s meeting could result in no change in production levels after the group in August finished restoring cuts made during the depths of the COVID-19 pandemic following months of steady, moderate increases. OPEC+ is in “standby mode” but could “signal their willingness to adjust output at short notice if required”, according to Commerzbank Research.

Saudi Energy Minister Abdulaziz bin Salman said on August 22 that the alliance could cut production at any time. That got attention in markets because Saudi Arabia is the dominant OPEC member, and his comments briefly sent oil higher. Analysts at Eurasia Group said, however, that “no immediate output reduction is expected” and that bin Salman may have simply sought to support the sagging price level.

His remarks “reflect a desire to prop up gradually falling crude prices” with a preferred level of around USD 100 per barrel for Brent, Eurasia Group analysts Raad Alkadiri and Milo McBride wrote in a note. They noted that higher prices have delivered a financial windfall to the finances of the Saudis and other OPEC+ producers.

The cartel also must consider plans by the Group of Seven major democracies to impose a price cap on imports of Russian oil and what effect that might have on the market. The price level for the cap has not yet been set. Oil prices have gyrated in recent months: Recession fears have pushed them down, while worries of a loss of Russian oil because of sanctions over its invasion of Ukraine pushed them up.

Recently, recession fears have taken the upper hand. Economists in Europe are penciling in a recession at the end of this year due to skyrocketing inflation fed by energy costs, while China’s severe restrictions aimed at halting the spread of the coronavirus have sapped growth in that major world economy. Those falling oil prices have been a boon to US drivers, sending gasoline prices down to USD 3.82 per gallon from record highs of over USD 5 in June.

That month, fears that US and European sanctions would take Russian oil off the market helped push Brent to over USD 123. Those concerns are still out there because European sanctions aimed at Russian oil shipments won’t take effect until the end of the year.

On top of that, OPEC+ members have their eye on negotiations over a possible deal between Western governments and Iran on limiting Tehran’s nuclear programme. An agreement could mean an end to US sanctions that have taken much of Iran’s oil production off the market.

The International Energy Agency says a nuclear deal could add 1.3 million Iranian barrels per day to the global market within six months. Analysts say OPEC+ would seek to include that production in any new set of quotas and output goals. Iran is a founding member of OPEC but has been left out of recent production agreements because of the sanctions.

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Buy Maruti, ICICI Bank, SBI stocks to pocket up to 25% gain; Nifty Mar’23 target intact at 18400

The Indian stock market’s performance in August showed resilience with NSE Nifty 50 recovering by 16 per cent from the bottom touched on on 17th June. In broader markets, both mid and small cap indices, too, recovered by 22% and 18% for the same period, respectively. Axis Securities in its report noted that the recovery was led by positive FII flows and a robust earning season. The Research and brokerage firm has maintained Nifty’s March 23 target at 18,400 intact. Analysts have suggested to buy 7 large cap stocks — ICICI Bank, SBI, Maruti Suzuki, Coal India, among others to pocket up to 25 per cent gains in 18 months.

Axis Securities continues to maintain a positive long-term outlook on the market, supported by a favourable structure emerging with increasing Capex enabling banks to improve credit growth. “We foresee FY23/24 NIFTY EPS at 820/929. After Q1FY23, we marginally change our FY23/24 expectations by -0.7%/1% and stand conservative at 4%/7% below street expectations. We maintain our Nifty Mar’23 target of 18,400 by valuing it at 20X on FY24 earnings vs. 22X earlier,” it added. Axis Securities recommends investors use such dips in a phased manner to build a position in quality companies with an investment horizon of 12-18 months.

Large cap stocks to buy

ICICI Bank

Target: Rs 1,000 | Upside: 13%

Analysts say that ICICI Bank has been outperforming its peers and has been firing on all cylinders. ICICI Bank has ticked most boxes on growth, margins, and asset quality. Higher loan growth, improving operating profits, and a strong provision buffer coupled with a strong deposit franchise will help the bank achieve ROAE/ROAA expansion over FY23-25E. On the valuation front, it believes the bank continues to be on a comfortable footing.

Coal India

Target: Rs 262 | Upside: 12%

Analysts said that higher international coal prices and volume growth and CIL’s focus on closing the non-profitable manpower intensive high cost underground coal mines and expanding the large open cast mines will drive the profitability.

Tech Mahindra

Target: Rs 1,200 | Upside: 12%

Analysts believe Tech Mahindra has a superior services mix and multiple long-term contracts that are well-spread across the verticals, reducing its dependency on any one vertical. Furthermore, it foresees healthy tractions in Communications and Enterprise verticals which will greatly accelerate the company’s revenue growth moving forward.

Maruti Suzuki India

Target: Rs 10,270 | Upside: 13%

Analysts say that Maruti Suzuki has a stronghold in the entry-Level segment and with recent launches in the compact (All-New Brezza) & mid SUV (Grand Vitara) segment it seems to be moving towards regaining lost market share by FY25E. It expects a rise in demand from new launches along with upgradation of existing product portfolio, softening commodity inflation and improving ECU shortages to support recovery in the margins. The company would gain further market share, driven by an expected shift towards petrol, CNG and hybrid vehicles.

State Bank of India

Target: Rs 665 | Upside: 25%

Amongst the PSU banks, SBI remains the best play on the gradual recovery of the Indian economy on account of its healthy PCR, robust capitalization, strong liability franchise, and an improved asset quality outlook. Analysts believe normalization in credit costs and improved growth outlook should lead to double-digit ROEs.

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Petrol sales rebound in India, jump 5.8% in August, diesel lags on fall in consumption

Petrol sales in India rebounded in August but diesel continued to show a decline over the previous month as rains in several parts chipped away demand in some sectors, preliminary industry data showed. Petrol sales, which had dipped 5 per cent in July, increased 5.8 per cent to 2.81 million tonnes in August when compared with 2.66 million tonnes of demand in the previous month.

The consumption was almost 16 per cent higher than August 2021 and 31.7 per cent more than 2.14 million tonnes in the same month in 2020. It was 20.6 per cent higher than the pre-pandemic demand of 2.33 million tonnes in August 2019. Diesel, the most widely used fuel in the country, saw consumption drop 4.9 per cent to 6.11 million tonnes from 6.42 million tonnes in July.

The monsoon rains weigh heavily on diesel demand in the country and consumption traditionally is lower in July-September than in April-June. Rains restrict mobility and demand from the farm sector, which uses diesel in irrigation pumps and trucking. Diesel demand had dipped 13.1 per cent in July.

Consumption of diesel in August was, however, 23.5 per cent higher year-on-year, supported by strong economic growth and a relatively low baseline for the same period in 2021 when the second wave of COVID-19 had impacted the economy.Diesel demand was 43.4 per cent higher than the 4.26 million tonnes demand during August 2020 and 11.6 per cent more than the pre-COVID sale of 5.48 million tonnes in August 2019, the data showed.

The decline in auto fuel sales in July and August came after a surge in June that was supported by increased summer travel to colder areas of the country to escape from the heat and vacations during annual breaks at educational institutions.As the aviation sector opened up, India’s overall passenger traffic (both domestic and international) at airports inched closer to pre-COVID-19 levels.

Accordingly, jet fuel (ATF) demand more than doubled to 541,000 tonnes during August when compared to the previous month. It was 51.4 per cent higher than last year and 118.9 per cent more than August 2020. It, however, was 14.3 per cent lower than pre-COVID August 2019.

With strong economic growth of 7.1 per cent, India’s oil demand has been rising steadily since the country eased pandemic lockdowns. Cooking gas LPG sales were up 5 per cent year-on-year at 2.44 million tonnes in August. LPG consumption was 7 per cent higher than in August 2020 and 2.5 per cent more than in August 2019. Month-on-month, the demand slipped 1 per cent when compared to 2.46 million tonnes of LPG consumption during July, the data showed.

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