Oil stockpiles are under the spotlight after many OPEC+ nations, headed by Saudi Arabia, pledged voluntary cutbacks from May 2023 through end-2023 of about 1.1mb/d. 

The oil market is projected to grow tighter following the OPEC+ supply reduction paired with increased oil prices. Indian OMCs are deemed likely to be under pressure.

Oil equities traded widely in red on Monday after the Organization of the Petroleum Exporting Countries (OPEC) cut supply for the current year. OMCs like HPCL and BPCL suffered a big impact and dropped by 4-5%. 

Heavyweight RIL and Adani Group’s Adani Total Gas were also under pressure. Nonetheless, Petronet LNG and ONGC emerged as top gainers. Meanwhile, crude oil prices have risen up substantially. Investors are apprehensive as the oil market is likely to grow tighter ahead.

At the time of writing, BSE Oil & Gas index decreased by 126.16 points or 0.73% to trade at 17,257.24. The index was approaching the day’s low of 17,230.93.

HPCL was the biggest underperformer by plummeting almost 5% followed by BPCL which sank 4.2%. Adani Total Gas and Indraprastha Gas dropped by 2.9% and 2.08%. Indian Oil dipped by roughly half a percent, while Reliance Industries was slightly weaker.

Of the gainers, Petronet LNG grabbed the lead, jumping by 2.2%. ONGC advanced by 1.8%. Whereas Gujarat Gas and GAIL are slightly higher. Crude oil prices climbed up on Monday following the OPEC+ supply reduction.

In its recent research dated April 3rd, Kotak Institutional Equities analysts stated, various OPEC+ nations, led by Saudi Arabia, have agreed to voluntary reduction from May 2023 to end-2023 of about 1.1mb/d. With the 500kb/d decrease announced by Russia lately, they might reach roughly 1.6mb/d. In contrast to OPEC+ output decreasing only by ~0.5mb/d from the announced 2mb/d reduction in November 2022, the existing decrease may lead to a substantially bigger production cut.

“The cutbacks strengthen our forecast of oil markets growing tighter in 2HCY23. Presumably, increased oil prices are bad for India as such, and notably for OMCs,” Kotak’s letter added.

The firm took notice that although OPEC+ had promised a 2mb/d production cut from November 2022, the actual drop in output has been just approximately 500kb/d. Many nations were already generating below-target levels and were not anticipated to reduce. 

Although nations generating greater than the objective had lowered output by ~1.2 Mb/day, this was countered by almost 700kb/d increased production from countries that were producing below-target levels (such as Nigeria, Kazakhstan, and Russia) (such as Nigeria, Kazakhstan, and Russia).

In regards to OMCs, the brokerage said, “we believe that the oil markets will get progressively tighter, with rising demand (particularly China reopening), curbs on Russian exports, and US SPR releases slowing. Now, with OPEC+ announcing a large cut, and most of it likely to be implemented, the risk of the market getting tighter is higher, in our view.”

According to Kotak, a higher price is bad for downstream oil marketing companies (OMCs) as under-recoveries on petrol, diesel, and LPG may return if prices climb beyond $90/bbl as we think OMCs are unlikely to have pricing independence at least till 2024 general elections. For upstream firms, there will not be any gains from increased oil prices, since windfall taxes restrict oil price realization to roughly $75/bbl.