Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
OIL & GAS INDUSTRY OVERVIEW
Key observations
As opined earlier, Brent crude oil price has surged further and has touched
as high as USD$120/bbls (currently trading at USD$114/bbls), highest in more
than two-and-a-half years due to supply concerns arising from escalating
violence and protests in Libya after Cairo, dollar depreciation and rising
demand. We are still cautious on geo-political issues which can impact the
crude oil price in the short term.
According to EIA, global oil product demand for 2010 and 2011 is revised up by 120
kbopd mainly due to higher-than-expected demand in non OECD Asia and improved
economic prospects for OECD North America. In 2010, global oil demand rose by
2.8 Mn bopd (YoY) to 87.8 Mn bopd and in 2011 it is expected to rise by 1.5 Mn
bopd (YoY) to reach 89.3 Mn bopd.
In Jan'11, OPEC crude supply increased to two-year highs at 29.85 Mn bopd with
Iraq's crude oil supply increased substantially. OPEC effective spare capacity stands
at 4.7 Mn bopd. Saudi Arabia has assured that it will fill the gap if there is any supply
disruptions from Libya.
The long lingering concern for India was the payment to Iran for crude oil imports
has now been settled. As on 1st March'11 payment of Euro 1.5 bn has been made
to the Central Bank of Iran. MRPL is the biggest importer for Iran's crude oil.
We believe the recent rapid surge in oil prices will have a negative impact on the
world economic growth, especially to the emerging economies like India, China and
Africa. For India, higher oil prices lead to inflation, a fall in tax revenues and an increase
in the budget deficit.
Indian basket of crude oil is trading above USD$100/bbls, which is major negative
for India as the country imports around 75-80% of its crude oil requirement.
Union Budget 2011 has pegged the petroleum subsidy provision at Rs. 236 Bn for
FY12 as against Rs.383.9 Bn. We believe the allocation made for FY 12 is very low
considering the current crude oil price levels.
For FY11, till now the government has given a subsidy of Rs. 210 Bn to the OMCs for
the losses incurred on retail fuel sale and made a further provision of ~Rs.173.86 Bn
for FY11. We expect rising oil prices and regulated retail fuel prices will lead to gross
under-recovery of ~Rs.850-1000 Bn in FY11.
In order to ensure the future energy security of India, the government is setting up a
underground storage in the form of unlined rock caverns with total storage capacity
of 5.33 Mn MT at three locations
We believe that the key beneficiary of rising crude oil price will be upstream exploration
companies like Cairn India, Selan exploration and Hindustan oil exploration.
High crude oil prices will also support R&D activities in alternative sources of energy
which will help companies like Praj Industries.
Sensex v/s Oil and Gas sector performance analysis
In the last one month, Sensex had given a return of 2.3% whereas Bse Oil and Gas
Index had given 2.4% return. In Feb'11, Gujarat Gas had given the highest return of
22.56% (Good result declared) followed by Cairn India 5.87% (rising crude prices
lead to better margins), RIL 3.95% (Deal with BP) and Aegis 1.31%. All other stocks
were in RED, worst performer was Aban offshore with -14.07% return.
OIL AND GAS SECTOR UPDATE
Key factor pushing prices up:
Brent crude oil prices surged due to the concern that Libya's violence can disrupt
exports from Africa's third biggest supplier and spread to other crude producing nation
is west Asia. Libyan leader Muammar Gaddafi and the president of the Arab
League agreed to a peace plan from Venezuela's President Hugo Chavez to end the
crisis in the North African country. We believe this will cool off the rising crude oil
prices in the short term but we still remain cautious on crude oil.
Brief background:
Libya is the world's 18th largest oil producer and the tenth largest exporter. Libya's
benchmark Es Sider grade crude oil is a low density and low sulfur content, similar
to North Sea Brent crude. Libya has the largest proven oil reserves in Africa with 44
billion barrels as of January 2010 (EIA).
The surging crude oil prices will have serious impact on the global economic growth.
If the crude oil expenditure to global GDP ratio (Oil burden) exceeds 5%, it will impact
the global recovery. Higher oil price will impact the fiscal deficit of emerging
economies like India and will have severe impact on the spending of the economy.
The domestic exploration companies with a presence in Libya include OIL India (operator
along with IOCL) and OVL.
Libya produces 2% of the total world oil and exports 85% to Europe. So this makes
Europe more vulnerable but this fear of vulnerability has spread all over and spiked
up the prices. So though currently the protests in Libya have led to the spiking oil
prices, the reason is more psychological as traders fear more instability in the region.
OPEC crude supply scaled two-year highs in Jan'11 at 29.85 mb/d, with Iraq underpinning
the 280 kb/d monthly increase. OPEC NGLs in 1Q11 rise by 200 kb/d to 5.7
mb/d on gains from Qatar and UAE. The 2011 'call on OPEC crude and stock
change' now averages 29.9 mb/d after upward revisions to demand, close to observed
January OPEC output levels. OPEC effective spare capacity stands at 4.7 mb/
d.
n According to the EIA latest short-term energy outlook, Natural-gas inventories
are expected to remain high through 2011, resulting in an average Henry Hub
natural-gas spot price of $4.1 per million Btu (MMBtu).
The spread between Brent and WTI crude oil continues to widen, with Brent oil
prices trading at around a $14 premium to WTI. However, we believe going forward
the spread between the two will lessen.
US West Texas Intermediate (WTI) and ICE Brent crude (Brent) are the world's two
main oil price benchmarks. Brent is a light crude oil but WTI is lighter. Hence, WTI
typically trades at a premium to Brent, reflecting its superior, lower-sulfur composition
and also the additional cost of shipping crude to the US, until recently.
Perspective from Indian Markets
The Indian crude oil basket consists of average of Oman & Dubai and Brent crude oil
in the ratio of 67.6 (Sour) and 32.4 (Sweat) as on 1st April'10. Hence, with the
surge in Brent crude oil prices and also Dubai crude, the Indian crude oil price has
also increased.
The above chart shows that the spread between Brent crude oil and Henry Hub
Natural gas price had already crossed the last three years high. This reflects that the
natural gas prices failed to keep pace with the price of crude oil mainly on account
of fear of shale gas supply glut in the US and major spurt in crude oil prices due to
geo-political tension.
BDCS is trading slightly above the last three years average price but far higher than
its lows.
Brent crude oil is lighter crude as compared to Dubai crude, so Brent crude oil trades
at a premium to Dubai crude oil. All complex refineries have the capacity to process
heavy crude like Dubai crude. The spread between the heavy crude and light crude
oil gives an indication of the incremental margins that a complex refinery will make
over the simple refinery.
As opined earlier, the companies having complex refining capacity like RIL, Essar
Oil, MRPL had shown significant improvement in GRMs in Q3FY11.
During the period under-review, the correlation between Dollar Index and Crude oil
is - 0.76 which reflects strong inverse relation.
n All global commodities are mainly traded in US dollar. Hence, price of dollardenominated
commodities tend to rise when the US currency weeks i.e. there
exists an inverse relationship between the US dollar and the other asset classes.
n The US dollar Index tracks the US currency's progress against a basket of six
leading currencies - EUR (Euro), JPY (Japanese yen), GBP (Pound sterling), CAD
(Canadian dollar), CHF (Swiss franc) and SEK (The Swedish krona).
n The US Dollar Index (USDX) indicates the general intrinsic value of the USD. The
USDX does this by averaging the exchange rates between the USD and six major
currencies.
Hence, one of the key factors strengthening the crude oil prices is the weakening of
the US Dollar.
n The surge in refining margin was led by an increase in Jet/Kero spread (14%)
and Gasoil spread (9%).
n The Naphtha cracks had fallen due to major surge in crude oil prices.
n Naphtha's crack spread slumped to a five-month low, indicating reduced profit
from making the petrochemical feedstock.
n Asian gasoline's premium to naphtha widened after prices of the motor fuel increased
by 5%. Gasoline's premium to naphtha jumped to $11.65 a barrel. A
wider reforming margin means the profit from turning naphtha into gasoline is
increasing.
n Currently, GNS is trading above its last three years average spread.
n Naphtha is used primarily as feedstock for producing a high-octane gasoline
component via the catalytic reforming process. The reforming margin (gasoline's
premium to naphtha) measures increased demand for chemicals used plastic
pipes to shopping bags.
n Bigger gap signals naphtha is less valuable to refiners relative to gasoline. A narrower
reforming margin could prompt Asia's refiners to switch to naphtha from
gasoline.
n After touching 3-years high, LPG price is now trading below its peak in the last
three years. LPG is the generic name for propane and butane gas. The mixture is
predominantly propane in winter and butane in summer.
n India is the largest consumer of LPG in Southeast Asia, and it meets its domestic
demand by importing about 3Mn MTPA of cooking gas. In FY11, the demand of
LPG is expected to rise to14 Mn MTPA by the Petroleum Planning Analysis Cell.
The country's dependence on LPG imports is increasing due to a 5-8% annual
growth in consumption. International price of LPG has soared due to winter demand.
n We expect the demand will soar with the implementation of the Rajiv Gandhi
LPG Vitrak Yojana that envisages covering 75% of India's population by 2015.
n The correlation between Sensex and Bse Oil and Gas Index is ~ 90.6%.
n In the last one month, Sensex has given a return of 2.3% and Bse Oil and Gas
Index has given a return of 2.4%.
n We are bullish on Cairn India, Selan Exploration and HOEC and believe this
rising crude oil prices will improve the margins.
Key Indian Macro Factors
Payment for Crude Oil imports from IRAN
The long lingering concern for India was the payment to Iran for crude oil imports
has now been settled. The crises begin consequent to the withdrawal of the Asian
Clearing Union mechanism (ACU) by the Reserve Bank of India with effect from
23rd Dec'10. Hence, all payments to Iran for import of crude oil have to be settled
in any permitted currency outside the ACU mechanism.
The payments to Iran (NIOC) upto 22nd Dec'10 were being made through the ACU
Mechanism. The pending dues of National Iranian Oil Company (NIOC) for import of
crude oil are now being cleared. As on 1st March'11 payment of Euro 1.5 bn has
been made to the Central Bank of Iran.
Underground Oil Storage Project
The recent violence and protest in Libya has raised concern for the supply of crude
oil. In order to ensure the future energy security of India, the government is setting
up a underground storage in the form of unlined rock caverns with total storage
capacity of 5.33 Mn MT at three locations viz. Visakhapatnam (storage capacity:
1.33 MMT), Mangalore (storage capacity: 1.5 MMT) and Padur (storage capacity:
2.5 MMT).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
OIL & GAS INDUSTRY OVERVIEW
Key observations
As opined earlier, Brent crude oil price has surged further and has touched
as high as USD$120/bbls (currently trading at USD$114/bbls), highest in more
than two-and-a-half years due to supply concerns arising from escalating
violence and protests in Libya after Cairo, dollar depreciation and rising
demand. We are still cautious on geo-political issues which can impact the
crude oil price in the short term.
According to EIA, global oil product demand for 2010 and 2011 is revised up by 120
kbopd mainly due to higher-than-expected demand in non OECD Asia and improved
economic prospects for OECD North America. In 2010, global oil demand rose by
2.8 Mn bopd (YoY) to 87.8 Mn bopd and in 2011 it is expected to rise by 1.5 Mn
bopd (YoY) to reach 89.3 Mn bopd.
In Jan'11, OPEC crude supply increased to two-year highs at 29.85 Mn bopd with
Iraq's crude oil supply increased substantially. OPEC effective spare capacity stands
at 4.7 Mn bopd. Saudi Arabia has assured that it will fill the gap if there is any supply
disruptions from Libya.
The long lingering concern for India was the payment to Iran for crude oil imports
has now been settled. As on 1st March'11 payment of Euro 1.5 bn has been made
to the Central Bank of Iran. MRPL is the biggest importer for Iran's crude oil.
We believe the recent rapid surge in oil prices will have a negative impact on the
world economic growth, especially to the emerging economies like India, China and
Africa. For India, higher oil prices lead to inflation, a fall in tax revenues and an increase
in the budget deficit.
Indian basket of crude oil is trading above USD$100/bbls, which is major negative
for India as the country imports around 75-80% of its crude oil requirement.
Union Budget 2011 has pegged the petroleum subsidy provision at Rs. 236 Bn for
FY12 as against Rs.383.9 Bn. We believe the allocation made for FY 12 is very low
considering the current crude oil price levels.
For FY11, till now the government has given a subsidy of Rs. 210 Bn to the OMCs for
the losses incurred on retail fuel sale and made a further provision of ~Rs.173.86 Bn
for FY11. We expect rising oil prices and regulated retail fuel prices will lead to gross
under-recovery of ~Rs.850-1000 Bn in FY11.
In order to ensure the future energy security of India, the government is setting up a
underground storage in the form of unlined rock caverns with total storage capacity
of 5.33 Mn MT at three locations
We believe that the key beneficiary of rising crude oil price will be upstream exploration
companies like Cairn India, Selan exploration and Hindustan oil exploration.
High crude oil prices will also support R&D activities in alternative sources of energy
which will help companies like Praj Industries.
Sensex v/s Oil and Gas sector performance analysis
In the last one month, Sensex had given a return of 2.3% whereas Bse Oil and Gas
Index had given 2.4% return. In Feb'11, Gujarat Gas had given the highest return of
22.56% (Good result declared) followed by Cairn India 5.87% (rising crude prices
lead to better margins), RIL 3.95% (Deal with BP) and Aegis 1.31%. All other stocks
were in RED, worst performer was Aban offshore with -14.07% return.
OIL AND GAS SECTOR UPDATE
Key factor pushing prices up:
Brent crude oil prices surged due to the concern that Libya's violence can disrupt
exports from Africa's third biggest supplier and spread to other crude producing nation
is west Asia. Libyan leader Muammar Gaddafi and the president of the Arab
League agreed to a peace plan from Venezuela's President Hugo Chavez to end the
crisis in the North African country. We believe this will cool off the rising crude oil
prices in the short term but we still remain cautious on crude oil.
Brief background:
Libya is the world's 18th largest oil producer and the tenth largest exporter. Libya's
benchmark Es Sider grade crude oil is a low density and low sulfur content, similar
to North Sea Brent crude. Libya has the largest proven oil reserves in Africa with 44
billion barrels as of January 2010 (EIA).
The surging crude oil prices will have serious impact on the global economic growth.
If the crude oil expenditure to global GDP ratio (Oil burden) exceeds 5%, it will impact
the global recovery. Higher oil price will impact the fiscal deficit of emerging
economies like India and will have severe impact on the spending of the economy.
The domestic exploration companies with a presence in Libya include OIL India (operator
along with IOCL) and OVL.
Libya produces 2% of the total world oil and exports 85% to Europe. So this makes
Europe more vulnerable but this fear of vulnerability has spread all over and spiked
up the prices. So though currently the protests in Libya have led to the spiking oil
prices, the reason is more psychological as traders fear more instability in the region.
OPEC crude supply scaled two-year highs in Jan'11 at 29.85 mb/d, with Iraq underpinning
the 280 kb/d monthly increase. OPEC NGLs in 1Q11 rise by 200 kb/d to 5.7
mb/d on gains from Qatar and UAE. The 2011 'call on OPEC crude and stock
change' now averages 29.9 mb/d after upward revisions to demand, close to observed
January OPEC output levels. OPEC effective spare capacity stands at 4.7 mb/
d.
n According to the EIA latest short-term energy outlook, Natural-gas inventories
are expected to remain high through 2011, resulting in an average Henry Hub
natural-gas spot price of $4.1 per million Btu (MMBtu).
The spread between Brent and WTI crude oil continues to widen, with Brent oil
prices trading at around a $14 premium to WTI. However, we believe going forward
the spread between the two will lessen.
US West Texas Intermediate (WTI) and ICE Brent crude (Brent) are the world's two
main oil price benchmarks. Brent is a light crude oil but WTI is lighter. Hence, WTI
typically trades at a premium to Brent, reflecting its superior, lower-sulfur composition
and also the additional cost of shipping crude to the US, until recently.
Perspective from Indian Markets
The Indian crude oil basket consists of average of Oman & Dubai and Brent crude oil
in the ratio of 67.6 (Sour) and 32.4 (Sweat) as on 1st April'10. Hence, with the
surge in Brent crude oil prices and also Dubai crude, the Indian crude oil price has
also increased.
The above chart shows that the spread between Brent crude oil and Henry Hub
Natural gas price had already crossed the last three years high. This reflects that the
natural gas prices failed to keep pace with the price of crude oil mainly on account
of fear of shale gas supply glut in the US and major spurt in crude oil prices due to
geo-political tension.
BDCS is trading slightly above the last three years average price but far higher than
its lows.
Brent crude oil is lighter crude as compared to Dubai crude, so Brent crude oil trades
at a premium to Dubai crude oil. All complex refineries have the capacity to process
heavy crude like Dubai crude. The spread between the heavy crude and light crude
oil gives an indication of the incremental margins that a complex refinery will make
over the simple refinery.
As opined earlier, the companies having complex refining capacity like RIL, Essar
Oil, MRPL had shown significant improvement in GRMs in Q3FY11.
During the period under-review, the correlation between Dollar Index and Crude oil
is - 0.76 which reflects strong inverse relation.
n All global commodities are mainly traded in US dollar. Hence, price of dollardenominated
commodities tend to rise when the US currency weeks i.e. there
exists an inverse relationship between the US dollar and the other asset classes.
n The US dollar Index tracks the US currency's progress against a basket of six
leading currencies - EUR (Euro), JPY (Japanese yen), GBP (Pound sterling), CAD
(Canadian dollar), CHF (Swiss franc) and SEK (The Swedish krona).
n The US Dollar Index (USDX) indicates the general intrinsic value of the USD. The
USDX does this by averaging the exchange rates between the USD and six major
currencies.
Hence, one of the key factors strengthening the crude oil prices is the weakening of
the US Dollar.
n The surge in refining margin was led by an increase in Jet/Kero spread (14%)
and Gasoil spread (9%).
n The Naphtha cracks had fallen due to major surge in crude oil prices.
n Naphtha's crack spread slumped to a five-month low, indicating reduced profit
from making the petrochemical feedstock.
n Asian gasoline's premium to naphtha widened after prices of the motor fuel increased
by 5%. Gasoline's premium to naphtha jumped to $11.65 a barrel. A
wider reforming margin means the profit from turning naphtha into gasoline is
increasing.
n Currently, GNS is trading above its last three years average spread.
n Naphtha is used primarily as feedstock for producing a high-octane gasoline
component via the catalytic reforming process. The reforming margin (gasoline's
premium to naphtha) measures increased demand for chemicals used plastic
pipes to shopping bags.
n Bigger gap signals naphtha is less valuable to refiners relative to gasoline. A narrower
reforming margin could prompt Asia's refiners to switch to naphtha from
gasoline.
n After touching 3-years high, LPG price is now trading below its peak in the last
three years. LPG is the generic name for propane and butane gas. The mixture is
predominantly propane in winter and butane in summer.
n India is the largest consumer of LPG in Southeast Asia, and it meets its domestic
demand by importing about 3Mn MTPA of cooking gas. In FY11, the demand of
LPG is expected to rise to14 Mn MTPA by the Petroleum Planning Analysis Cell.
The country's dependence on LPG imports is increasing due to a 5-8% annual
growth in consumption. International price of LPG has soared due to winter demand.
n We expect the demand will soar with the implementation of the Rajiv Gandhi
LPG Vitrak Yojana that envisages covering 75% of India's population by 2015.
n The correlation between Sensex and Bse Oil and Gas Index is ~ 90.6%.
n In the last one month, Sensex has given a return of 2.3% and Bse Oil and Gas
Index has given a return of 2.4%.
n We are bullish on Cairn India, Selan Exploration and HOEC and believe this
rising crude oil prices will improve the margins.
Key Indian Macro Factors
Payment for Crude Oil imports from IRAN
The long lingering concern for India was the payment to Iran for crude oil imports
has now been settled. The crises begin consequent to the withdrawal of the Asian
Clearing Union mechanism (ACU) by the Reserve Bank of India with effect from
23rd Dec'10. Hence, all payments to Iran for import of crude oil have to be settled
in any permitted currency outside the ACU mechanism.
The payments to Iran (NIOC) upto 22nd Dec'10 were being made through the ACU
Mechanism. The pending dues of National Iranian Oil Company (NIOC) for import of
crude oil are now being cleared. As on 1st March'11 payment of Euro 1.5 bn has
been made to the Central Bank of Iran.
Underground Oil Storage Project
The recent violence and protest in Libya has raised concern for the supply of crude
oil. In order to ensure the future energy security of India, the government is setting
up a underground storage in the form of unlined rock caverns with total storage
capacity of 5.33 Mn MT at three locations viz. Visakhapatnam (storage capacity:
1.33 MMT), Mangalore (storage capacity: 1.5 MMT) and Padur (storage capacity:
2.5 MMT).
No comments:
Post a Comment