Crude oil at $100, but why are OMCs not on a slippery slope? Decoded

Oil at $100: OMC stocks have already been punished significantly, and therefore investors are not reacting in panic after such a major fall, believe analysts.

Crude oil above $100 a barrel would normally spell trouble for India’s oil marketing companies (OMCs). This time, however, Dalal Street seems remarkably unfazed.

 

OMCs were trading on a mixed-to-flat note on Thursday. While Indian Oil Corporation (IOCL) and Bharat Petroleum Corporation (BPCL) have lost less than half a percent, Hindustan Petroleum Corporation (HPCL) shares are up about 1 per cent. This is when international Brent crude prices are at $101.

 

Since August 31, when crude prices first touched $90 a barrel amid renewed tensions between the US and Iran, OMCs' stock prices have fallen just 2–5 per cent based on today's low. This is significantly lower than the 17–22 per cent correction seen over 10 days starting March 6, when crude had first crossed the $90-a-barrel mark.

 

 

The difference is also stark over a shorter timeframe: in the five sessions following August 31, OMCs were broadly flat, compared with a 6–9 per cent decline during five trading days following March 6, according to ACE Equity data.

 

OMCs are losing ₹5 per litre on petrol and ₹23 per litre on diesel currently as pump prices remain frozen. The government cumulatively raised petrol prices by ₹7.35 per litre and diesel rates by ₹7.53/l in May, across four instalments. READ MORE

 

What explains this divergence?

Despite a negative impact on the financial health of OMCs, the stock prices haven't moved much due to multiple reasons.

 

G Chokkalingam, founder, Equinomics Research, said after the initial fall, the recovery for OMCs was marginal, resulting in a more muted impact this time. According to NSE data, IOCL remains 16 per cent lower for the year, BPCL 20 per cent and HPCL 29 per cent.

 

As the stocks have already been punished significantly, investors are not reacting in panic after such a major fall, he added.

 

Furthermore, despite escalation in West Asia tensions, analysts don't expect crude to hit the levels seen at the peak of the crisis. Nomura, in an August 25 note, said that it remains bearish on oil prices in the medium-to-long-term given the highest-ever potential global oil surplus in 2027E. It expects Brent to normalise closer to pre-crisis levels once the dust settles.

 

Gaurang Shah, head of investment strategy at Geojit Investments, said the international expectation is that crude could rise to around $106–108 a barrel, but is unlikely to move significantly beyond that. This is much lower than the $120 mark oil had hit in April.

 

He also pointed to India's efforts over the past six months to secure its energy requirements from sources outside the Middle East, which could limit the pressure on oil marketing companies this time around.

 

Additionally, the Q2FY27 outlook for OMCs is sequentially better than Q1FY27, despite continued volatility stemming from the West Asia conflict. "Marketing economics have improved sequentially, supported by the full impact of auto-fuel/LPG price hikes, sequentially lower average crude oil prices following the sharp correction in the first half of July, and a sharp decline in LPG under-recoveries," said Emkay Global in a note on September 8. That said, volatile crude prices pose risks to its full-year earnings estimates.

 

Going ahead, Chokkalingam advised investors to avoid these counters in the short term. Conversely, for Shah, OMCs are good long-term bets as he expects some kind of support from the government towards the oil marketing companies.

 

Emkay, too, has 'ADD' calls on the OMCs, with a target price of ₹160 on IOCL, ₹370 on BPCL and ₹410 on HPCL.

 

Disclaimer: Views and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers' discretion is advised.