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Oil prices may rise to $90/bbl this FY as Ukraine war looms, brokerage says; 16% upside for GAIL stock

The limited supply of oil from Russia rigs and curtailed oil production by OPEC+ countries will likely result in soaring oil prices, Kotak Securities said.

Oil price rise
Crude oil prices are expected to rise to $90 per barrel in FY 2023, higher than earlier expectations of $80 per barrel, brokerage says.

Crude oil prices are expected to rise to $90 per barrel in FY 2023, higher than earlier expectations of $80 per barrel, as the Russia-Ukraine conflict continues to put pressure. The limited supply of oil from Russia rigs and curtailed oil production by OPEC+ countries will likely result in soaring oil prices, Kotak Securities said. However, oil and gas companies such as GAIL (India), Oil & Natural Gas Corp (ONGC), and Oil India Ltd are expected to benefit from high oil prices, and see higher earnings, the brokerage said. It reiterated its ‘Buy’ rating on GAIL stock, saying it sees a 16 per cent upside at Rs 195 apiece. On Monday, GAIL’s shares closed 0.40 per cent down at Rs 167.95 apiece.

“We expect oil prices to remain elevated in the near term given i) the ongoing uncertainty that oil markets face from the Russian-Ukraine conflict, ii) lower exports of Russian crude oil and petroleum products driven by self-sanctioning and iii) curtailed increases in oil production by the OPEC+ cartel in the near term to ease a tight market,” Kotak Securities said in a note Monday.

However, these high crude oil prices are expected to benefit upstream domestic oil companies such as GAIL, especially as it benefits from the rise of oil as well as LNG prices. Kotak said it has reiterated a Buy rating for the stock however it has upped earnings estimates for the stock. It sees fair value of Rs 195 apiece for the oil and gas processing company. The company’s stock is up nearly 28 per cent so far  this year. “We reiterate our BUY rating on GAIL with a FV of Rs195 as it benefits from a rise in profitability of LPG production and LNG marketing segments; elevated spot LNG prices in comparison also augur well for the latter,” the brokerage said. 

Kotak also sees an upside to earnings estimate for ONGC and Oil India benefiting from higher oil prices, however the two stocks have already factor elevated prices sustaining in FY 2024 estimates. higher leverage of profitability to oil prices as the stocks already factor elevated prices sustaining in FY2024E, while production and operational trends provide no comfort. 

“We retain our SELL rating on ONGC and OIL despite higher leverage of profitability to oil prices as the stocks already factor elevated prices sustaining in FY2024E, while production and operational trends provide no comfort,” Kotak said. ONGC stock is up 22 per cent YTD while Oil India stock is up 19 per cent YTD.

In the current year 2022, global oil prices are expected to remain high in the near term, the brokerage said, adding global demand for oil is witnessing headwinds due the Ukraine conflict and resurgence of Covid-19 pandemic in countries including China. One, the ongoing conflict which has impacted global economic growth and hence dented oil demand and two, a resurgence of the pandemic in China and other countries are major headwinds this year, the brokerage added.

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