Crude View: D-Street experts peg Brent at $75-80 in near-term, Morgan Stanley cuts forecast by $5 on soft demand

Benchmark Brent crude futures are hovering at a 33-month low of $70 per barrel due to recent global developments, which have led to ample supplies amid weaker demand prospects. The global sell-off in crude oil compelled the producer group Organisation of Petroleum Exporting Countries and its allies (OPEC+) to pause its planned October oil output hike for two months.

Last week, reports of resolving a dispute that had halted Libyan crude supply led to Brent futures falling to ~$71/bbl. According to domestic brokerage Prabhudas Lilladher, the marginal cost of production at fag end of the cost curve is upwards of $70/bbl. Hence, D-Street analysts expect that global crude oil prices will not remain below $70/bbl marl for long.

Also Read: OPEC+ to pause planned October oil output hike of 180,000 bpd for two months

‘’While upstream earnings are currently impacted, with OPEC+ delaying its planned rise in production, we expect oil prices to rebound to $75-80/bbl in the near term. Thus, net oil realization should return to ~$75/bbl. APM price is set to rise in FY26E, and gas produced from new wells will attract premium pricing. These bode well for upstream players,'' said experts at Prabhudas Lilladher.

D-Street analysts on crude oil prices

In response to the lower oil prices, OPEC+ decided to postpone its planned increase in oil production by at least two months. “Thus, we expect crude oil prices to reach $75-80/bbl levels again. While upstream companies’ net oil realization has fallen from ~$75/bbl, we do not anticipate this to continue for long,” said the domestic brokerage.

Gas produced from new wells will see a 20 per cent premium over the APM price, which is determined monthly at 10 per cent of the imported Indian crude basket and capped at $6.5/mmBtu. Consequently, incremental gas produced by ONGC and Oil India will benefit from better realization. ‘’The APM ceiling price is set to be revised to $6.75/mmBtu from FY26. Thus, gas realization looks to be rising for upstream companies," said analysts at Prabhudas Lilladher.

Also Read: Oil crashes to 33-month low after OPEC+ slashes demand forecasts, Brent sinks below $70 for first time since Dec 2021

How low crude oil prices impact Indian OMCs?

OPEC+ pumps around 40 per cent of the world's crude and its policy decisions can have a major impact on oil prices. Indian oil marketing companies (OMCs) usually witness an uptrend in their stock prices when international crude oil prices trade lower. On the other hand, high crude rates result in inflation and a higher import bill for India, which is a net importer of crude oil.

Domestic brokerages say state-owned Oil India and Oil and Natural Gas Corp (ONGC) are the most favourably placed to reap results due to dividend play and attractive valuations when Brent crude futures are at the $80/bbl mark. 

For ONGC, the brokerage has built-in 3.4 percent and 7.2 per cent CAGR volume growth in oil and gas production over FY24-26E to 22.6 MMT and 23.7 cm, respectively. For Oil India, it has built-in eight per cent and 16 per cent CAGR volume growth in oil and gas production over FY24-26E to 3.9mmt and 4.3bcm, respectively.

ONGC expects its capital expenditure (capex) to be in the range of ₹33,000- ₹35,000 crore for the current fiscal (FY25). ONGC's capex for FY24 came at ₹37,000 crore. ONGC accounts for about two-thirds of India’s oil and more than 50 per cent.

‘’We upgrade our rating on ONGC from ‘Hold’ to ‘Accumulate’ with a target price (TP) of ₹329 based on 9x FY26 adj EPS and adding the value of investments. We maintain ‘Buy’ on Oil India with a TP of ₹786 based on 12x FY26 adj EPS and adding the value of investments,'' said Prabhudas Lilladher.

Also Read: ONGC share price drops over 2% after sharp fall in crude oil prices; analysts expect more 21% downside for the PSU stock

Morgan Stanley slashes Brent crude price view on softer demand

Morgan Stanley cut its Brent crude oil forecasts for coming quarters and said the global oil market is facing a period of demand weakness similar to those seen during recessions. The bank said rising fuel inventories, lower refining margins, and the spreads between the current price and future estimates echo previous recessionary periods or other moments of weak demand.

Those include the periods of falling demand in 2007-2008 due to the financial crisis and in 2020 due to the onset of COVID, the investment bank said. There are also parallels with non-recessionary periods of lacklustre demand and higher supply in 2013 and in 1992-1993, said the bank.

Also Read: Crude oil plunges on demand-supply imbalance in 2024, Brent down 20% in 12 months; OPEC+ in focus

The bank explored the possibility of oil prices acting as a recessionary indicator. Still, it concluded that it was too early and acknowledged that the market was pricing in a substantial deterioration in the balance of supply and demand.

Seasonal demand strength usually subsides after summer, and supply from both OPEC and non-OPEC sources is likely to re-accelerate in the fourth quarter and 2025, leading to a shift in the supply and demand balance, the bank said.

However, the OPEC+ focused on balancing the market, as evidenced by its decision to delay output increases that were due to start in October. Morgan Stanley expects oil markets to remain tight in the third quarter, move closer to balance in the fourth quarter, and show a surplus of one million barrels per day in 2025.

Also Read: US Fed set to announce first rate cut in four years next month: How will it impact India’s RBI policy? Experts weigh in

The bank cut its Brent price forecast for the fourth quarter of 2024 by $5 per barrel to $75, a level it now sees for all quarters next year. It had previously been forecasting Brent to average $78 in the first quarter of 2025 and to decline steadily throughout the year to $75 in the fourth.

"Although rising OPEC output is a key factor behind the surplus we model for 2025, we would be hesitant to argue that this justifies the recent price decline," it said, adding that the market appears modestly oversold in the short term. It added that Brent will likely remain anchored around the mid-$70s if demand weakens more.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.