OPEC+ cuts oil output, gas prices soar: What's next for investors?

OPEC+ meeting: While analysts said the current output cut is insignificant to move the needle on oil prices, they cautioned that more output cuts may push oil prices higher, impacting India

The Oil and Gas sector is going through a perfect storm with investors likely eyeing a cold winter. On Monday, OPEC and its allies (OPEC+), led by Russia, agreed to cut output by 100,000 barrels per day (bpd) for October.

This will amount to 0.1 per cent of global demand, and is aimed at bolstering prices that have slid on fears of an economic slowdown. It effectively reverses an increase in supply by a similar amount last month.

While analysts said the current output cut is insignificant to move the needle on oil prices, they cautioned that more output cuts in future may push oil prices higher, impacting India in the long-run.

Also Read: Opec+ to cut crude oil output by 100k barrels per day from October

"The key takeaway from the OPEC+ meeting is that the group is ready to cut output to support prices. In the event of any sharp slowdown in the global economy, OPEC+ will step up its effort to push prices," said Dayanand Mittal, research analyst tracking the sector at JM Financial Institutional Securities.

As per government estimates, every $1 per barrel increase in crude oil prices impacts Indian current account deficit (CAD) by around $1 billion as the country meets over 85 per cent of its crude oil demand via imports.

VK Vijayakumar, chief investment strategist at Geojit Financial Services, meanwhile, remained hopeful that India may be able to finance CAD of 2.5 per cent on the back of robust foreign portfolio investments as long as oil prices hold at current levels.

From an investment view point, he suggested investors stay away from both, upstream and downstream, oil companies.

"With crude remaining around $100/barrel, there is no upward potential in upstream oil companies engaged in oil drilling. Down stream companies, engaged in refining, too, are struggling due to  the government's control on prices. Thus, oil related segments are best avoided for now," he said.

Soaring gas prices

European gas prices rocketed as much as 30 per cent higher on Monday, with the benchmark gas price surging as high as 272 euros per megawatt hour (MWh), after Russia said one of its main gas supply pipelines to Europe – Nord Stream 1 -- would stay shut indefinitely.

Nearer home, spot liquefied natural gas (LNG) prices in Asia touched a record high of $70 per metric million british thermal unit (mmbtu) last week, a 3-fold increase in three months.

Given the ballooning global prices, analysts at ICICI Securities see downside risks to margin estimates for listed players for the rest of fiscal 2022-23 (FY23).

"Assuming a very high spot LNG price range of $40-45/mmbtu for the second half of fiscal 2023 (H2FY23), and limited options to pass through the same in the absence of any petrol/diesel price hikes, EBITDA/scm for Indraprastha Gas/Mahanagar Gas can reduce by 20-38 per cent, and that for Gujarat Gas can rise by 35 per cent oin FY23. For GAIL, Gujarat State Petronet, and Petronet LNG, lower volumes and/or higher costs can reduce EBITDA by 6-20 per cent," ICICI Securities said.

Average gas costs for the CGD players remained muted in the March quarter of fiscal 2021-22 (Q4FY22) and increased 25 per cent quarter on quarter (QoQ) in Q1FY23 amid reduction in domestic gas allocation over the past 6 months, and the record rise in spot LNG prices over the same period.

To be sure, CGD companies have raised CNG prices by 50-70 per cent since October 1, 2021. Analysts opined a further hike in domestic gas price to $10/mmbtu for H2FY23, might push CGD companies to hike CNG price by another 25 per cent or about Rs 20/kg, which will erode the competitiveness of CNG and impact near-term volume growth/margin.

ICICI Securities has a 'buy' rating on IGL, MGL, GGL, GAIL and GSPL, and a 'reduce' rating on Petronet LNG.

JM Financial, too, maintains 'buy' on IGL, and MGL due to robust pricing power, and steady volume growth story.

"Further, despite high spot LNG price posing a risk to Gujarat Gas’ margin/volume, we reiterate 'buy' on the stock as we expect its volume growth momentum to sustain in the medium to long term led by rise in gas use by industrial consumers," the brokerage said.