GAIL India poised for sustained outperformance with multiple growth drivers
GAIL (India) Ltd, the country’s largest gas distributor, appears set for a period of sustained outperformance over the next 2-3 years, driven by multiple favorable factors, according to a report by ICICI Securities. The company’s strong performance is expected to be underpinned by growing domestic gas supplies, LNG liquefaction capacity, moderate pricing, normalisation of LPG prices, and an improving petrochemical segment. The report highlights the prospect of rising earnings in each of GAIL’s key segments over the next few years. Notably, the increasing gas supply and favorable price differentials between US Henry Hub prices and spot LNG are identified as key drivers of potential upside. ICICI Securities has reiterated a “BUY” rating for GAIL India with a revised Sum of the Parts (SOTP) based target price of ₹154 (from ₹149). Domestic gas supplies in India have been on the rise in recent months, with domestic gas output reaching approximately 99 million metric standard cubic meters per day (mmscmd). Reliance Industries Limited (RIL) has played a significant role in this increase, with a substantial rise in its gas output and further expected growth. The imminent commencement of ONGC’s KG basin asset and the potential for more affordable LNG supplies in the coming years are anticipated to boost domestic gas consumption by approximately 20 mmscmd by FY25E, thereby positively impacting GAIL’s transmission segment earnings and trading segment volumes. LPG and petrochemical segments on the rise The report indicates that the upward trend in LPG (propane) prices witnessed over the last two months is expected to continue in the medium term. This development is significant for GAIL, as every USD 50 per metric ton rise in LPG prices is projected to improve segment EBITDA by ₹4.1 billion. Additionally, an increase of USD 100 per metric ton in HDPE prices is expected to enhance petrochemical EBITDA by ₹5.5 billion. The gas costs for the LPG segment are forecasted to remain flat over FY24-25E, increasing only by USD 0.5 per Million Metric British Thermal Units (MMBtu) thereafter. The petrochemical segment is also expected to benefit from improving realizations, moderated spot LNG prices, and enhanced utilization, leading to a sharp rise in EBITDA from these two segments by FY25E.
Supply Cuts Boost Oil Prices But Economic Concerns Limit Gains
A slew of bullish and bearish factors have battled for dominance in the oil market this year as OPEC+ efforts to tighten the market have run up against concerns about global economic growth. For most of the first half of this year, prices were trading in a relatively narrow range of $70-$80 per barrel until the extra Saudi production cuts on top of OPEC+ reductions lifted market sentiment and oil prices higher in July and August, and to a year-2023 peak of over $90 a barrel this week after Saudi Arabia and Russia extended their respective supply cuts into the end of the year. Oil prices haven’t shot up much, however, weighed down by persistent concerns about economic growth in the world’s two largest economies, the United States and China, and an already weak, barely-there growth in Europe. Uncertainty prevails and continues to keep oil prices in a narrow range, ironically leading to relatively stable oil prices, Reuters columnist Clyde Russell notes. True, the latest announcement of extensions of the supply cuts sent oil prices higher. But they only moved up to an $85-$90 per barrel trading range, and analysts are not racing to predict $100 oil in the near term. That’s because uncertainty is looming large over the global economy and oil demand growth. Bullish Factors The OPEC+ production cuts have tightened the market, especially the market for sour crude, as Middle Eastern exporters – the largest sour crude producers – hold off some shipments. Saudi Arabia, for example, is estimated to have seen its August crude oil exports plunge to the lowest since March 2021 as the Kingdom continues to slash production by 1 million barrels per day (bpd) to keep markets tight and push oil prices higher. The market is tight, and the latest announced cuts through the end of the year are likely to deepen the deficit in the fourth quarter, supporting oil prices, analysts say. “For now, tight market conditions are still on clear display through the elevated backwardation shown across the forward price curve, not least at the very front where prompt spreads in WTI and Brent both commanding a backwardation around 65 cents per barrel, up from close to flat around the time Saudi production cuts were implemented,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, wrote in a note on Wednesday. “While the upside in our opinion remains limited there is no doubt that the current production cuts will keep the oil market tight, thereby providing support for oil prices, but whether that support translate to stable or higher prices will depend on incoming macro-economic data, and with that the outlook for demand,” Hansen added. The latest cuts “leave the market with a deeper than expected deficit over the fourth quarter of 2023, which should continue to support prices,” ING strategists Warren Patterson and Ewa Manthey said. The bank, however, is “reluctant to revise higher our price forecasts on the back of this extension, as demand concerns continue to linger and Iranian supply is rising.” ING’s oil balance projection shows a small surplus in the first quarter of 2024, which should limit prices moving significantly higher. The bank continues to forecast that Brent Crude prices will average $92 a barrel over the fourth quarter of this year. “Looking further ahead, we would not rule out a further extension of these cuts (fully or partially) into early next year, given that our balance sheet shows that the oil market will be in a small surplus over the first quarter of next year. Any cuts will obviously depend on where oil is trading towards the end of the year and whether demand worries are still present,” ING strategists said. Bearish Factors Macroeconomic headwinds and demand worries, especially in China, have been ever-present since early this year when Chinese macroeconomic data showed a less-than-spectacular rebound after the reopening. In addition, higher interest rates in the U.S. compounded concerns about whether the Fed will pull off a ‘soft landing’ after more than a year and a half of interest rate hikes. The latest data suggest that the labor market is cooling, and the Fed could pause the hikes when they meet at the end of this month. But if the move higher in oil stokes inflation again, interest rates could be kept higher for longer, dampening economic growth and oil demand. China’s crude oil demand is currently strong, driven by stock building and demand from refineries, which are exporting more fuel amid weak domestic demand, Saxo Bank’s Hansen said. Higher oil prices added to slowing economies in China and Europe, and potentially in the U.S., “does not in our opinion support sharply higher prices,” he added. “We do not join the $100 per barrel camp but will not rule out a relatively short period where Brent could trade above $90.”
Diesel consumption declines for third month in a row in August; petrol usage up
India’s diesel consumption, the mainstay of the country’s transport sector, fell 3 per cent m-o-m to 6.7 million tonnes (mt) in August 2023 as rains, particularly in eastern India, impacted mobility. Lower demand from the farm sector to some extent also led to the decline. However, high-speed diesel (HSD) usage in the country was higher by 6 per cent y-o-y from 6.3 mt in August last year, data from the Petroleum Planning and Analysis Cell (PPAC) showed. On the other hand, petrol, or motor spirit (MS) consumption rose by 4 per cent m-o-m to 3.1 mt last month, while on an annual basis, the usage was almost flat at 3 mt. The higher consumption was majorly from the personal mobility segment as weekend personal travel and tourism witnessed a slight uptick and higher demand for cooling due to heat and humidity also contributed, albeit marginally, to the increase in usage. Interestingly, diesel consumption declined for the fourth consecutive month in a row in August, on the other hand, petrol consumption after hitting south for three consecutive months since May 2023, rose last month. POL usage up Overall, consumption of petroleum products (POL) rose by 2.5 per cent to 18.57 mt during August 2023. On an annual basis, the consumption rose by 6.5 per cent from 17.44 mt in August 2022. Following a usage trajectory similar to petrol, POL consumption also rose last month after declining consecutively every month since May 2023. POL consumption last month rose on the back of higher factory activity. The seasonally-adjusted S&P Global PMI showed a robust improvement in manufacturing sector conditions across India, as new orders and output increased at the quickest rates in nearly three years during August. Firms scale up Firms geared up to handle rising demand by scaling up buying levels and rebuilding their input stocks at the second-strongest pace in 18-and-a-half years of data collection. Demand strength was pivotal to August’s robust performance, spurring the fastest upturn in new orders since January 2021, it added. Despite rains, the consumption of Aviation Turbine Fuel (ATF) managed to grow by 2 per cent m-o-m and 14 per cent y-o-y to 6,76,000 tonnes, largely aided by international travel during the month. Monsoons are a lean period for the airlines. Analysts expect India’s petroleum products demand to rise during the October-December quarter aided by rising industrial activity and preparations for the festival season. ICICI Securities in a June 2023 report said that after the last three years (FY21, FY22 and FY23) of relative weakness, it expects Indian fuel consumption to steadily grow over the next 2 years. This is helped by softer product prices and prices of petrol and diesel being held at the same level in the last 13-14 months. Besides, stronger economic growth predicted for the Indian economy in the next 2-3 years and the potential pass through of the supernormal marketing margins being earned on retail fuels, can spur better pricing power for petrol and diesel.
Adani Total Gas to build 500-TPD CBG plant for Ahmedabad Municipal Corporation
Adani Total Gas has received a work order from Ahmedabad Municipal Corporation (AMC) to design, build, finance, and operate a 500-tonnes-per-day capacity Bio-CNG (CBG) plant, the company informed the regulatory exchanges on September 6. The plant will be operated by Adani Total Gas for a concession period of 20 years. The plant is based on PPP Model. It will come up at Pirana/Gyaspur, Ahmedabad. In its latest annual report, Adani Total Gas has announced its plan to invest Rs 180 billion to Rs 200 billion in the next eight to 10 years to expand infrastructure for retailing CNG to automobiles and piped gas to households and industries. The company retails CNG to vehicles and piped natural gas (PNG) to household kitchens across 124 districts in the country. Bio-CNG is an environmental friendly fuel and has very low emissons, so it is very important to build Bio-CNG plants.
GAIL India expects to source 20-25% of LNG on short-term or spot basis
GAIL (India) Ltd, the state-run natural gas distributor, expects to secure about 20% to 25% of its supply of liquefied natural gas (LNG) on a short-term or spot market basis, Reuters reported quoting a company official. The rest of the LNG will be via long-term contracts, GAIL’s marketing director, Sanjay Kumar said at the Gastech industry conference in Singapore on Thursday, as per the report. He added that the company would tap spot markets to meet seasonal demand or volatility, the report said. Meanwhile, in the quarter ended June 2023, GAIL (India) reported a decline of 45% in consolidated net profit at ₹17.93 billion as compared to ₹32.50 billion in the corresponding period last year. The state-run gas distributor’s revenue from operations in Q1FY24 fell 13% to ₹328.48 billion, compared to ₹379.42 billion in the year-ago period.
ADNOC Gas, PetroChina sign $550 million LNG deal
ADNOC Gas has announced an agreement, valued between $450 million and $550 million to supply Liquefied Natural Gas (LNG) to PetroChina, one of the leading oil and gas producers and distributors in China. This agreement, according to ADNOC, underscores its growing global presence, particularly in the East and South Asian markets. Competition for LNG has increased since Russia’s invasion of Ukraine last year, with Europe importing record volumes of the supercooled fuel to replace Moscow’s gas supplies. “Natural gas plays a crucial role as a transitional fuel, generating lower-carbon emissions compared to other fossil fuels, and ADNOC Gas is committed to ensuring reliable supply to its customers around the world,” the company noted in a press release. This agreement follows several recent international LNG sales agreements, including those with Japan Petroleum Exploration Co (JAPEX), TotalEnergies Gas and Power, and India Oil Corp (IOCL). ADNOC Gas continues to leverage opportunities from ADNOC’s integrated gas masterplan, which links every part of the gas value chain in the UAE, ensuring a sustainable and economic supply of natural gas to meet local and international demand.
GAIL to tap spot LNG markets to meet surge in power demand
GAIL (India) Ltd will tap spot liquefied natural gas (LNG) markets to address surging power demand, an executive at the state-run company said on Thursday, as the Indian government calls for more supplies to address an electricity crunch. Much of India’s domestic gas supply is already committed, Sanjay Kumar, marketing director at India’s top distributor of natural gas, said on the sidelines of the Gastech conference. “So if there is actually demand, we will buy,” Kumar said, declining to comment on volumes. “We have been servicing the demand for the last one month also. Demand is already there,” he said. Over half of India’s roughly 25 gigawatts (GW) of gas-fired power capacity is non-operational because of relatively high LNG prices. The share of gas-fired power in overall output has fallen from an average of over 3% in the last decade to less than 2% currently because of the high prices.
Oil prices spike as Saudi Arabia, Russia extend 1.3 million barrel a day oil cut through December
Saudi Arabia and Russia agreed on Tuesday to extend their voluntary oil production cuts through the end of this year, trimming 1.3 million barrels of crude out of the global market and boosting energy prices. The dual announcements from Riyadh and Moscow pushed benchmark Brent crude above $90 a barrel in trading Tuesday afternoon, a price unseen in the market since November. The countries’ moves could increase inflation and the cost for motorists at gasoline pumps. It also puts new pressure on Saudi Arabia’s relationship with the United States, as President Joe Biden last year warned the kingdom there would be unspecified “consequences” for partnering with Russia on cuts as Moscow wages war on Ukraine. Saudi Arabia’s announcement, carried by the state-run Saudi Press Agency, said the country still would monitor the market and could take further action if necessary. “This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets,” the Saudi Press Agency report said, citing an unnamed Energy Ministry official. State-run Russian news agency Tass quoted Alexander Novak, Russia’s deputy prime minister and former energy minister, as saying Moscow would continue its 300,000 barrel a day cut. The decision “is aimed at strengthening the precautionary measures taken by OPEC+ countries in order to maintain stability and balance of oil markets,” Novak said. Benchmark Brent crude traded Tuesday above $90 a barrel after the announcement. Brent had largely hovered between $75 and $85 a barrel since last October. A barrel of West Texas Intermediate, a benchmark for America, traded around $87 a barrel. White House national security adviser Jake Sullivan declined to comment on the market impact of the decision, though he said U.S. officials had regular contact with the kingdom. He added that Biden would look to utilize “everything within his toolkit” to assist American consumers. “The thing that we ultimately stand for is a stable, effective supply of energy to global markets, so that we can in fact deliver relief to consumers at the pump, and we do this in a way that is consistent with the energy transition over time,” Sullivan said. Bob McNally, the founder and president of the Washington-based Rapidan Energy Group and a former White House energy adviser, said Saudi Arabia and Russia had “demonstrated their unity and resolve to proactively manage” the risk of oil prices potentially dropping in tougher economic conditions with their announcement Tuesday. “Barring a sharp economic downturn, these supply cuts will drive deep deficits into global oil balances and should propel crude oil prices well above $90 per barrel,” McNally said. The average gallon of regular unleaded gasoline in the U.S. stands at $3.81, according to AAA, just under the all-time high for Labor Day of $3.83 in 2012. However, gasoline demand typically drops for U.S. motorists after the holiday so it remains unclear what immediate effect this could have on the American market, AAA spokesman Andrew Gross said. “I’m more concerned about what the rest of hurricane season may hold,” Gross told The Associated Press. “A big storm along the Gulf coast could move prices dramatically here.” Hurricane Idalia just plowed through Florida and U.S. forecasters said Tuesday that Tropical Storm Lee in the Atlantic Ocean will become an “extremely dangerous” hurricane by Friday. Meanwhile, higher gasoline prices can increase transportation costs and ultimately push the prices of goods even higher at a time when the U.S. and much of the world is already raising interest rates to combat inflation. “The impact these cuts will have on inflation and economic policy in the West is hard to predict, but higher oil prices will only increase the likelihood of more fiscal tightening, especially in the U.S., to curtail inflation,” said Jorge Leon, a senior vice president at Rystad Energy. The Saudi reduction, which began in July, comes as the other OPEC+ producers have agreed to extend earlier production cuts through next year. A series of production cuts over the past year has failed to substantially boost prices amid weakened demand from China and tighter monetary policy aimed at combating inflation. But with international travel back up to nearly pre-pandemic levels, the demand for oil likely will continue to rise. The Saudis are particularly keen to boost oil prices in order to fund Vision 2030, an ambitious plan to overhaul the kingdom’s economy, reduce its dependence on oil and to create jobs for a young population. The plan includes several massive infrastructure projects, including the construction of a futuristic $500 billion city called Neom. But Saudi Arabia also has to manage its relationship with Washington. Biden campaigned on a promise of making the kingdom’s powerful Crown Prince Mohammed bin Salman a “pariah” over the 2018 killing of Washington Post columnist Jamal Khashoggi. In recent months, tensions eased slightly as Biden’s administration sought a deal with Riyadh for it to diplomatically recognize Israel. But those talks include Saudi Arabia pushing for a nuclear cooperation deal that includes America allowing it to enrich uranium in the kingdom – something that worries nonproliferation experts, as spinning centrifuges open the door to a possible weapons program. Prince Mohammed already has said the kingdom would pursue an atomic bomb if Iran had one, potentially creating a nuclear arms race in the region as Tehran’s program continues to advance closer to weapons-grade levels. Saudi Arabia and Iran reached a detente in recent months, though the region remains tense amid the wider tensions between Iran and the U.S. Higher oil prices would also help Russian President Vladimir Putin fund his war on Ukraine. Western countries have used a price cap to try to cut into Moscow’s revenues. But those sanctions have seen Moscow be forced to sell its oil at a discount to countries like China and India.
The G7 Has No Immediate Plans To Review Its Russian Oil Price Cap
Despite the fact that Russia’s oil is now trading above the G7 price cap due to the oil rally in recent weeks, the group of the world’s top economies and its allies have shelved the regular reviews of the price ceiling, Reuters reported on Wednesday, quoting sources familiar with the matter. At the end of last year, G7, the EU, and allies including Australia imposed a price cap of $60 for Russia’s crude oil if Russian crude shipments to third countries outside the EU are to use Western insurance and financing. For most of this year, most Russian crude grades – including Urals – have traded below the price cap as international benchmark prices were trading in a narrow range of around $75-$80 per barrel. However, with recent rises in Brent prices and narrowed discounts of Russian crude oil, Moscow’s crude has moved above the price cap. Despite the rise in prices, the G7 group hasn’t reviewed the cap since March this year and has no immediate plans to do so, four sources with knowledge of the G7 policies told Reuters. “There were some talks in June or July to do a review, or at least talk about it, but it never formally happened,” a diplomatic source told Reuters. “The share of tankers covered by the price cap in crude oil shipments out of Russia stayed around 50–55% in July, dropping by around 5% compared to the prior month. For oil products & chemicals, the coverage of the price cap coalition has remained more stable at around 65% in July,” the Centre for Research on Energy and Clean Air (CREA) said in its latest monthly snapshot for July. The price of Russia’s flagship crude grade, Urals, averaged $74 per barrel in August, slightly down from August 2022, but way above the G7 price cap of $60 and higher than the July average of $64.37 a barrel, data released by the Russian Finance Ministry showed last week. Between January and August 2023, the average price of Urals was $56.58 per barrel, compared to an average of $82.13 a barrel for the same period of 2022.
China’s Influence In Oil Markets Grows With BRICS Expansion
Piece by piece, China continues to build alternatives to each of the key building blocks of the West’s world order, including – crucially – a new global oil market order, as analysed in full in my new book of the very same name. The latest building block is the invitation to three of the world’s biggest oil and gas powers – Saudi Arabia, Iran, and the UAE – to join the BRICS political and economic grouping, comprised of Brazil Russia, India, China, and South Africa. This can be considered as a developing world alternative to the U.S.-dominated Group of Eight (G8) major industrialised nations from which Russia was suspended indefinitely in March 2014 following its annexation of Ukraine’s Crimea. As it stands, Iran and the UAE said that they will accept the invitation, while Saudi Arabia stated that it is considering the proposal. With the addition of all three new members, the BRICS group would control around 41 percent of all global oil production, according to International Energy Agency estimates. In practical terms, though, it is irrelevant whether Saudi Arabia formally joins or not, as all three countries – and virtually all of the Middle East’s major oil and gas players – have already pledged their allegiance to China in one of its geopolitical building blocks or another. While BRICS can be considered China’s alternative to G8 (now G7 again following Russia’s permanent withdrawal in January 2017), the Shanghai Cooperation Organisation (SCO) is a much bigger deal altogether. As exclusively reported by OilPrice.com at the time, and analysed in full in my new book, Saudi Arabia had already signed a memorandum of understanding on 16 September 2022 granting it the status of SCO ‘dialogue partner’. At that point, the Kingdom did nothing to encourage the release of the news at that point, unlike later in April this year – just after it had agreed to a stunning resumption of a relationship deal with Iran, brokered by China. By then, Saudi Arabia had decided that the time was right to ensure full coverage for the news that its cabinet had approved a plan to join the SCO as a dialogue partner. As also exclusively reported by OilPrice.com at the time, Iran approved its own ‘full membership’ to the SCO back in September 2021 and was granted it on 4 July this year. Iran’s membership of the SCO simply rubber-stamped China’s control over the country – and over neighbouring Iraq, heavily influenced by Iran – through the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and fully examined in my new book. Unlike the rather vague operational parameters of the BRICS organisation, the SCO is very specific, very powerful, and very serious in its objectives. Already it is the world’s biggest regional political, economic and defence organisation both in terms of geographic scope and population. It covers 60 percent of the Eurasian continent (by far the biggest single landmass on Earth), 40 percent of the world’s population, and more than 20 percent of global GDP. It was formed in 2001 on the foundation of the ‘Shanghai Five’ that was set up in 1996 by China, Russia, and three states of the former USSR (Kazakhstan, Kyrgyzstan and Tajikistan). Aside from its vast scale and scope, the SCO believes in the idea and practice of the ‘multi-polar world’, which China anticipates will be dominated by it by 2030. Veteran Russian Foreign Minister, Sergey Lavrov, has since stated that: “The Shanghai Cooperation Organisation is working to establish a rational and just world order and […] it provides us with a unique opportunity to take part in the process of forming a fundamentally new model of geopolitical integration”. Aside from these geopolitical redesigns, the SCO works to provide intra-organisation financing and banking networks, plus increased military cooperation, intelligence sharing and counterterrorism activities, among other things. The end of December 2021/beginning of January 2022 saw meetings in Beijing between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, and Bahrain, plus the secretary-general of the Gulf Cooperation Council (GCC). The principal topics of conversation, as analysed fully in my new book, were to finally seal a China-GCC Free Trade Agreement and to forge “a deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat”. Also during the meetings, Chinese President Xi Jinping and Saudi Crown Prince Mohammed bin Salman signed a China-Saudi partnership pact with King Salman. The new pact pledged cooperation in finance and investment, innovation, science and technology, aerospace, oil, gas, renewable energy, and language and culture. Having got all the names gathered to sign these all-consuming cooperation agreements, Xi then identified two ‘priority areas’ that he believes should be addressed as quickly as possible. The first is the transition to using the Chinese renminbi currency in oil and gas deals done between the Arab League countries and China, and the second is to bring nuclear technology to targeted Middle Eastern countries, beginning with Saudi Arabia.