Stocks and spare capacity enough if Saudi output restarts in weeks
There were attacks at two Aramco plants on 14-Sep’19. Saudi Arabia on 15-Sep’19 said: 1) 5.7m b/d of oil output was temporarily suspended due to the attacks; 2) updated information would be provided within the next 48 hours; and 3) part of the fall in supply to customers would be compensated through inventory. Press reports indicate 2.0-2.3m b/d of output would be restored by 16-Sep’19 but restoring the entire output would take weeks. We believe there is enough crude inventory and spare capacity to supply markets if entire production is restored within a few weeks. Oil price movement would depend on when production is fully restored and whether there are any further attacks. If oil prices surge further it may be positive for ONGC/GAIL but may hurt the investor sentiment in OMCs.
* Oil price spike of 10% appears modest given the large supply disruption: Attacks on 14-Sep’19 at Abqaiq and Khurais plants, which have capacity to process 7m b/d of crude, led to temporary suspension of 5.7m b/d (over 50%) of Aramco’s oil output. Press reports indicate 2.0-2.3m b/d of output would be restored by 16-Sep’19 while restoration of entire output would take weeks. WTI and Brent price initially spiked 15-19% but are now up 10%. Spike in oil price appears modest despite 5.7m b/d being the largest oil supply disruption in history; oil price surged by 118% when supply was hit by 5.1m b/d in Nov’02 due to Venezuela oil workers’ strike for two weeks (see Chart on page 2). Modest oil price spike now despite a larger disruption suggests there is adequate crude inventory and spare crude production capacity to meet shortfall even if production is fully restored after a few weeks.
* OECD and Saudi’s crude inventory to dip by only 4.7% if output is fully restored after a month; some ramp up in output from spare capacity likely: Assuming 2m b/d of output restarts on 16-Sep’19 and balance after 30 days, there would be a shortfall of 3.7m b/d for 30 days implying 111m bbls of shortfall. 111m bbls drawn from inventory would reduce Saudi and OECD strategic petroleum reserves (SPR) and commercial crude inventory of 2,367m bbls by just 4.7%. US President has authorised release from SPR of 630m bbls, if needed (amount to be decided later). OPEC and its non-OPEC allies may increase output from part of their 3.7m b/d spare capacity to make up for the shortfall, if required. US refineries are expected to cut throughput by 1.6m b/d for seasonal maintenance in Sep-Oct’19, which may mean shortfall is less than 3.7m b/d.
* GRM may be strong in Sep-Oct’19 due to IMO and US seasonal maintenance; marketing margin to sustain if price rise passed on: Singapore GRM was up 32% last week at US$7.2/bbl boosted by rise in petrol and diesel cracks. Rising diesel demand due to IMO and reduced supply due to US seasonal maintenance may keep GRM strong in Sep’19 and Oct’19. International petrol and diesel prices have spiked by 8% and assuming they stay at this level, retail diesel and petrol price would have to be hiked by 4.0-7.0% over the next 15 days to fully pass on price rise and maintain auto fuel marketing margins; domestic price is based on 15-day moving average.
* GAIL and ONGC may gain if oil price remains high: Sustained high oil price for a few months would boost ONGC’s oil and petroleum product realisation and GAIL’s LPG realisation and gas marketing profit. GAIL makes high profit on marketing US LNG if Brent is over US$60/bbl. Only risk for ONGC may be if it has to bear subsidy
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