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Amidst an over-supplied oil market, OPEC has decided to maintain its production level, contrary to market anticipation of at least 1mb/d cut. We believe OPEC has effectively declared war against recent unconventional entrants. While there is little risk to US shale production growth even if oil price falls below USD70/bbl, Canadian oil sands could face some pressure. We have lowered our FY16 Brent price assumption 14% to USD80/bbl. Oil Marketing Companies’ (OMC) stocks (BPCL, HPCL, IOCL) are counter-cyclical to oil price and will be the largest beneficiaries on falling oil prices. They could book some inventory losses though. Cairn India, a pure play on oil, suffers the most as oil falls and ONGC is likely to lose as well as at current oil prices its net realisation is positively correlated to oil price (Chart 1). Reliance Industries (RIL) could also suffer marginally due to its US shale exposure. Top Picks: BPCL, RIL, GSPL.

OPEC maintains status quo on oil production

OPEC has decided to maintain its oil production quota unchanged at 30mb/d. This is against market anticipation of a production cut to defend steep decline in oil price. The organisation stated that it is comfortable at current level of oil price, which has fallen 35% since June 2014, and believes oil will find its equilibrium supported by output cuts from marginal players like US shale. However, we believe US shale production growth will continue to surprise the market even if Brent falls to USD65/bbl, while the higher cost Canadian oil sands can face some pressure for oil below USD80/bbl (refer Fig. 1).

Revising down oil price forecasts

We believe risk to US shale production is limited at current level of oil price and the current regime of lower oil price is likely to prolong in the absence of any major geopolitical events. Therefore, we cut our Brent price assumption for FY16 14% to USD80/bbl. We reduce our FY15 subsidy forecast (on LPG and kerosene) to INR770bn (INR819bn earlier) and cut FY16 subsidy estimate to INR480bn (INR611bn earlier).

OMC to benefit; ONGC, Cairn India to suffer

HPCL, BPCL and IOCL will be the largest beneficiaries. OMCs are counter-cyclical to oil prices (refer Chart 3) and their share prices will gain if oil prices fall further. There could be some inventory losses though. Cairn India will suffer the most on falling oil as it is the only pure oil play in India. However, the stock has fallen 25% since June 2014 and currently discounts USD62/bbl of Brent. ONGC is also likely to lose if oil falls from current levels (refer Chart 1). RIL’s US shale business will be negatively impacted.

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