While demand is expected to reach the record highs set before the -pandemic, supply of the black diamond is unlikely to keep pace and is most likely to remain stagnant or even fall eventually. That scenario is leading macro strategists such as Jefferies’ Christopher Woods to predict that another oil price crisis is looming like the two seen in the 1970s.
“Markets could be facing the risk of a third oil crisis just when the great and good, and related worthies, are proclaiming the end of the oil era,” Chris Wood said in his latest GREED & fear report.
Such is the bullishness among traders that Call options of $100 on the WTI crude are now the most widely owned Call option, suggesting that traders expect oil prices to hurtle towards that level by the end of next year, the Wall Street Journal reported.
Brokerage firm Kotak Institutional Equities shares Wood’s fear, and said it expected global crude oil prices to remain elevated over the coming years. The brokerage has raised its forecast for dated Brent prices to $65 a barrel for 2021-22 from $57.5 earlier.
With crude oil prices expected to march higher, Dalal Street has been rushing in to buy shares of Oil & Natural Gas Corp and Oil India, the only two listed oil producers in the country. Shares of ONGC have risen 27 per cent in the past six months, while those of Oil India 30 per cent in the same period.
Brokerage firm Kotak Equities is of the view that ONGC and Oil India are the wrong bets to make in a higher crude oil environment. “We recommend investors to avoid ONGC and OIL as a play on crude prices, despite its higher direct leverage on their profits,” Kotak Equities said.
For the brokerage firm, both the firms’ uninspiring production record despite large capital expenditure and operating costs as well as low cash generation and returns due to inefficient capital allocation trump any benefits they will receive from higher realisation for their products.
Kotak Equities instead urged its clients to use GAIL India in their portfolios as a hedge against higher crude oil prices, as the company would benefit from increase in profitability of LPG production and LNG marketing segments.
Further, as production of crude oil declines steadily in the US and other parts of the world due to reluctance of financial institutions to fund projects that are seen as harming the environment, natural gas production is also bound to take a hit and tighten supply.
“Although decreased demand, especially due to Indian lockdowns, have started to have an adverse impact on LNG prices, nonetheless crude-linked LNG prices remain strong; while expected commissioning of the fertiliser plants is expected to eliminate concerns on the trading segment, thereby warranting a re-rating of the stock,” brokerage firm
Service said in a recent note.
MOFS believes rising oil prices, along with all-time high petrochemical margins, will bode well for the stock.
