Oil-nomics - Chorus of US$100/bbl - A Grain of Salt! - YES Securities

We remain skeptical on the growing chorus of US$100//bbl. We believe that Brent values will peak out around US$80/bbl as OPEC supply will inevitably move higher given the lure of higher price realization and record high spare capacity.

- Although demand is recovering and moving closer to pre-COVID levels, it is rebounding from a depressed base and certainly not projected to sustain at elevated growth rates in the months ahead.

- With Global Oil demand for 2021 projected to remain 3mbpd below 2019 level amid OPEC spare production capacity of a record 7mbpd and projected global supply-demand deficit of 0.8mbpd, we think Oil at US$100/bbl is a difficult proposition to sell.

- We do not see OPEC resisting the opportunity to raise output amid lucrative prices, even if it means losing out on one of its oldest member. The tall risk remains that UAE's departure can jeopardize the cohesion of the group, with other producers turning less compliant on the production targets.

- OPEC major producers do not want to prolong the production curtailment to such a degree that higher Oil prices incentivizes adoption of renewable energy.

- Although negotiations between the US and Iran have various twists and turns and can turn quickly one way or the other, there is a growing opinion that we will have a deal by the end of this year. So, a potential incremental supply of around 2mbpd cannot be ignored by the markets.

- Rising operational efficiency will ensure that US output will continue to recover. As a case in point, US is producing an average 11mbpd with around 330 rigs, when compared with 750 rigs producing 12.3mbpd in 2019 and 1500 rigs producing 8.5mbpd in 2014.

- There is a lot of optimism about global demand during the second half of this year, though it is quite possible that demand will fall short of expectations. In fact, US DOE is projecting global demand growth to taper to 3.8% in 2022, when compared with 6.1% this year.

OPEC's curtailment induced global supply shortfall has bolstered Oil prices, though the projected deficit for this year is no match with the situation in 2007, when prices crossed US$100/bbl mark.

Source : Equity Bulls

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