OPEC aims to retain long-term dominance by letting market forces determine oil prices :Kotak Sec,link

Please Share::

2QFY15 GDP finds silver lining in agriculture; industry looks anemic
2QFY15 GDP growth at 5.3% was slower than 5.7% in 1QFY15. For 1HFY15, GDP growth was at
5.5% against 4.9% in 1HFY14. On the production side, the upside surprise partly came from the
agriculture and allied sector with a print of 3.2% in 2QFY15 from 3.8% in the last quarter. In line
with relatively weak IIP in the quarter, industrial growth had a muted print of 2.2% in 2QFY15
after a strong print of 4.2% in the previous quarter. A significant downtick in manufacturing
(0.1% yoy) was probably not surprising, given also the weaker merchandise exports performance
in the quarter ((-)1.6% as per expenditure side data). While mining sector was relatively muted at
1.9%, growth in electricity and construction was buoyant at 8.7% and 4.6%, respectively. While
industrial growth has bottomed, a sharp pick-up may be unwarranted due to the continuing
haziness of investment demand in the economy.
Services sector remains healthy
The growth of 7.1% in services in 2QFY15 was largely driven by ‘financing, insurance, real estate
and business services’ and ‘community, social and personal services’. The former slowed marginally
from 10.4% to 9.5% while the latter (a proxy for government spending) picked up to 9.6% from
9.1% in 1QFY15. ‘Financing, insurance etc.’ also witnessed a robust growth of 9.5% and is
expected to continue to perform better in the future quarters as inflation remains low and some
amount of pick-up in economic activity is seen. We expect services to grow at 7.2% in FY2015.
Consumption provides boost to expenditure-side GDP
On the expenditure side, the drag on growth came from investments and net exports. While gross
fixed capital formation growth was flat, net exports was a drag on GDP growth by 0.8%pt. On the
other hand, consumption demand was supported by 10.1% increase in government consumption,
while private consumption grew at 5.8%. Total consumption expenditure contributed 4.5%pt to
the headline real GDP growth print of 6% at market price.
GDP seen to rise to 5.5% in FY2015
Growth dynamics appear to have bottomed out. Global developments of softer crude oil prices
and commodity prices and the concurrent drop in the retail inflation (especially food) are likely
positive factors that can support a pick-up in overall growth. While industry is expecting some
monetary accommodation to support growth, easier interest rate is just not one factor in the
growth dynamics. Much of the future growth dynamics will depend on the continuation of the
government’s efforts to address the revival of the investment cycle. This will only be possible if the
government is able to address the structural issues in the economy, including labor laws, land
acquisition issues, unlocking capital from stalled projects, all directed towards improvement in the
productivity levels in the economy. For FY2015, we now see a growth of 5.5% (marginally lower
than our earlier estimate of 5.6%). Hoping that there are no adverse global shocks in the next few
months, FY2016 growth is seen at ~6%.

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
OPEC aims to retain long-term dominance by letting market forces determine oil prices
OPEC’s decision to withhold production cuts in an over-supplied market indicates its (or Saudi
Arabia’s) focus on retaining its long-term dominance. Saudi Arabia’s large oil (and forex)
reserves, surplus production capacity and low cost of production, can withstand lower oil prices
for some time. This could curtail production of inefficient marginal players in the medium term,
leading to some balance in global oil markets and higher prices. We shall watch for geopolitical
developments in Iraq, Libya, Nigeria and Venezuela—potential disruptions in any of these
countries may lead to quicker recovery in crude prices.
Cash cost of marginal producers to set a floor to crude price in the near term
In our view, crude prices may trade below marginal cost of production of US$65-70/bbl
(Canadian oil sands) in the near term given excess supply in global markets and weak seasonal
demand. Oil producers will indeed reduce their capital budgets and reduce long-term
investments. However, existing production may well continue as long as the marginal producers
are able to recover their cash cost of production. We note that cash cost of production for
Canadian oil sands is lower at US$45/bbl (see Exhibit 1).As Canadian crude trades at a discount
to global benchmarks, we see a floor of around US$55/bbl for Dated Brent crude.
We reduce crude price assumptions, noting excess supply in CY2015-16
We reduce our assumptions of Dated Brent crude price to US$92/bbl in FY2015, US$80/bbl in
FY2016 and US$85/bbl in FY2017, as OPEC’s decision to maintain production quotas will
exacerbate the global crude supply-demand balance (see Exhibit 2). We see incremental crude
production capacity (including OPEC and non-OPEC) of 4 mn b/d in CY2015-16 far outpacing
the IEA’s estimates of 2.4 mn b/d of growth in world oil demand (see Exhibit 3). If OPEC (or
Saudi Arabia, UEA and Kuwait) does not reduce its supply, global oil price may remain subdued
for a prolonged period until marginal inefficient players curtail production. Exhibit 4 shows
OPEC crude production over the past few months and expected capacity over next few years.
Lower crude prices a positive for the Indian economy
We see lower crude prices as a key positive for the Indian economy as it will reduce domestic
inflation, the current account deficit and fiscal burden pertaining to fuel subsidies. Lower
product prices will also provide some leeway to the government to increase taxes (rather than
reduce prices) to shore up its ‘net’ revenues from the petroleum sector. Exhibit 5 shows that
India’s CAD will reduce to negligible levels if crude sustains at the current level of US$70/bbl
through FY2016. Exhibit 6 shows our revised estimates of subsidy-sharing assumptions.
Impact on Indian energy companies will depend on government response
The impact of lower crude prices on PSU energy companies will be determined by the
government’s ability to (1) curtail LPG subsidies in a lower price environment and (2) formulate
a consistent subsidy sharing scheme. Nonetheless, we see risks to our assumptions of
US$60/bbl+ net realizations (and consequently, earnings estimates) for ONGC/OIL in FY2016,
unless the government absorbs a larger share of fuel subsidies at a lower level of crude prices.
We discuss the impact of lower crude prices on the energy sector companies in detail below.

LINK

http://www.kotaksecurities.com/pdf/indiadaily/indiadaily01122014aa.pdf