GAIL share price and target: OPEC+ has decided to rollover output for all members in Apr’21 except Russia and Kazakhstan, who have been allowed to boost output by 150k b/d. Saudi Arabia will continue its 1m b/d additional output cut in Apr’21, which will be gradually pruned from May’21. Thus, OPEC+ output cuts would be 8.2-7.2m b/d in Apr-Jun’21 vs 5.8m b/d in CY21 as per Apr’20 deal. OPEC+ capping supply, in the face of European demand weakness and the recent US crude inventory surge as snowstorms shut refineries, would mean supply deficit at 0.2-0.7m b/d in Q2CY21E. GAIL share price closed in yesterday's session at Rs 147.15, up Rs 2.7 or up 1.9%.

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Vaccine rollout boosting demand may mean supply deficit of 1.3-2.5m b/d in Q3-Q4CY21E even if OPEC+ prunes cuts to 5.8m b/d. OPEC+ capping supply until demand recovers will keep oil price high (positive for GAIL). ICICI Securities maintains buy rating with target price of Rs 164 on GAIL.

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Second wave of Covid hits demand:

Second wave of Covid meant petrol and diesel demand in Spain, Italy and Portugal was down 31-33% YoY and 17-21% YoY in Jan’21, respectively. Petrol demand in the UK, which was down 17% YoY in Dec’20, is down 44% YoY in Jan’21 and may be down 40% YoY in Feb '21. Petrol demand was down 32% YoY in Germany in Dec '20. IEA’s global oil demand estimate in Feb’21 for Q4CY20 was 2m b/d lower, for Q1CY21 1.9m b/d lower and for Q2CY21 1.2m b/d lower than at peak with most demand disappointment in OECD Americas and Europe.

WTI at over US$65/bbl & onshore oil rig count surge to drive gradual US oil output rise:

US oil output is up to 11.06m b/d in Dec’20 from a low of 10m b/d in May’20. US shale output at 7.0m b/d in Dec’20 was up 819k b/d from a low of 6.17m b/d in Apr’20. US oil output declined by 3.8m b/d at peak on 17-Feb due to snowstorms, but has largely recovered now. US oil onshore rig count, a lead indicator of output, which was up by 137 (80%) from lows in mid-Aug, is set to drive US output to 11.27m b/d in Dec’21. US oil output rise could be stronger in CY22E.

OPEC+ would have to delay or slow down pruning of output cuts if US lifts sanctions on Iran oil exports. Clarity on it is possible over the next three months. ICICI Securities estimate OPEC+ output cuts at 7.9-7.7m b/d in Q1-Q2CY2E, which will ensure supply deficit of 0.26-0.2m b/d in Q1- Q2. ICICI Securities estimated supply deficit of 1.3-2.5m b/d in Q3-Q4CY21E even if vaccine rollout boosting demand allows OPEC+ to prune output cuts to 5.8m b/d.

Risks to recommendation:

Downside risks to our recommendation are:

1)      Gas marketing EBITDA is lower than estimate
2)      lower than estimated gas transmission volumes & EBITDA.