Saudi move to cut crude output pulls OMC stocks down further

Shares of state-owned OMCs retreated for the second straight day. Bharat Petroleum Corp (BPCL) ended nearly 1% lower at the end of Monday’s trading after falling as much as 1.4% earlier in the session. Shares of Indian Oil Corp (IOC) and Hindustan Petroleum Corp (HPCL) also settled lower after falling 1-2%.

“There is a lot of uncertainty with respect to global growth rates and therefore demand and supply of crude oil,” said Deepak Jasani, head of retail research, at HDFC Securities. “OMCs may remain under pressure until more clarity on the dynamics of crude oil emerges.”

On Monday, Brent crude futures rose 2.5% to touch $78 a barrel. In the past four sessions, Brent crude is up nearly 7%.

This is after Saudi Arabia announced further cuts to its oil production. From July, its oil output will drop to 9 million barrels per day (bpd) from around 10 million bpd at the end of May.

As the outlook for OMCs remains uncertain and is more dependent on global events, analysts even flagged concerns about crude oil touching $100 a barrel on the back of consistent and timely production cuts by the members of the Organization of Petroleum Exporting Countries (OPEC), a cartel of oil-producing nations, as well as the decline in US oil rigs.

These cuts could result in large supply deficits in the second half of calendar 2023, they said.”More broadly and medium term, my view is oil is in the foothills of a multi-year boom price cycle,” said Bob McNally, founder and president of Rapidan Energy. “Only a recession can delay it.”

McNally says Sunday’s production cuts by Saudi Arabia will exacerbate supply deficits. At the same time, he expects the US economy to turn weaker, which will keep oil prices in a range. “It all depends on the underlying economy,” he said.

At home, Jasani sees limited upside in oil refineries despite favourable valuations and attractive dividend yield. However, he remains doubtful if crude oil prices will sustain at higher levels despite repeated cuts by top oil exporters against a backdrop of bleak global growth outlook.