Road ahead for investors amid OPEC output cut, European energy crisis

Brent crude prices are down about 23% since this year’s peak of 123 dollars per barrel, as economists predict recession in developed economies and muted demand globally.

However, to bolster prices, the Organization of the Petroleum Exporting Countries – or OPEC – and its allies, on Monday, decided to cut production for October by 100,000 barrels per day.

The move, however, didn’t surprise domestic market watchers, who remain unperturbed by the miniscule cut.

According to VK Vijayakumar of Geojit Financial Services, OPEC + decision to cut oil output by 100,000 barrels a day is only 0.1% of global demand. Therefore, it is grossly inadequate to move the needle on oil prices” – VK VijayaKumar, Chief Investment Strategist, Geojit Financial Services

Brent crude prices had jumped 4% after the announcement, but retreated around 1% later. 

That said, analysts caution against further cut in supply which may impact India in the long-term.

Dayanand Mittal, Research Analyst, JM Financial Institutional Securities says, OPEC+ outcome signals the group’s intention. More supply cuts likely to support prices. Economic slowdown in China, US, UK and Europe risks to oil demand. India meets 85% of crude oil demand via imports. High crude prices may hurt in the long-term

Meanwhile, another crisis is looming in the energy markets.

Spot liquefied natural gas prices in Asia touched a record high of 70 dollars per mmBtu last week, a 3-fold increase in three months.

This comes after Russia’s state-owned energy giant Gazprom shutdown the Nord Stream 1 pipeline indefinitely due to an oil leak in a turbine. 

With ballooning global prices, analysts see downside risks to margins of gas distributors in the near-term.

Probal Sen, Research Analyst, ICICI Securities says domestic gas costs may average $10/mmBtu for H2FY23. Spot LNG prices likely between $40-45/mmBtu. Sharp drop in EBITDA margins of CGDs likely in Q2 and Q3.

ICICI Securities expects EBITDA per standard cubic meter for Indraprastha Gas and Mahanagar Gas to reduce by 20-38%, but increase by 35% for Gujarat Gas in FY23. 

For GAIL, Gujarat State Petronet and Petronet LNG, lower volumes and/or higher costs can reduce EBITDA by 6-20%.

Overall, the near-term outlook for listed players linked to oil and gas sector remains uncertain. Analysts suggest only long-term investors stay put in these stocks.

On Wednesday, global cues and stock-specific action will guide the markets.