Shares of Indian oil marketing companies (OMCs) jumped on March 6 after Brent crude oil dropped below $70 per barrel, its lowest in 3 years. The decline boosted stocks of Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL), and Indian Oil Corporation (IOC), which surged up to 5%.
BPCL shares rose 3.2% to ₹264.20, HPCL shares gained 4.8% to ₹342.30, and IOC shares climbed 3.7% to ₹126.75 on the BSE.
Crude Prices Drop as OPEC+ Plans to Raise Supply
Oil prices fell after OPEC+ announced it would gradually reverse voluntary production cuts. The alliance plans to add 2.2 million barrels per day (mbpd) over the next 2 years, partially restoring the 5.9 mbpd supply cut since 2022.
Currently, Brent crude is up 0.56% at $69.69 per barrel, while U.S. West Texas Intermediate (WTI) crude has gained 0.59% to $66.70 per barrel. Over the past 4 sessions, Brent has dropped 6.5%, reaching its lowest since December 2021, while WTI has fallen 5.8%, its weakest level since May 2023.
OMCs to Benefit from Higher Margins
Crude at $70 per barrel creates a “sweet spot” for OMCs, allowing them to earn higher marketing margins on petrol and diesel.
- Diesel margins: ₹8 per litre
- Petrol margins: ₹12 per litre
Reports suggest the government may offer an LPG subsidy of ₹20,000 crore.
Impact on ONGC, Oil India, and GAIL
For upstream producers, ONGC and Oil India, crude at $70-75 per barrel may result in a 6-9% earnings cut. However, their stocks have already corrected in anticipation of lower crude prices, limiting further downside.
- Production update: ONGC’s oil production rose 1.5% YoY in January, supported by its KG 98/2 project, while Oil India’s gas production increased 7%. However, overall crude output grew only 1% YoY.
Meanwhile, GAIL may face challenges in its petrochemical and gas marketing business due to falling crude prices, as its earnings are linked to oil prices. Additionally, its U.S. LNG sales margins may be affected by stable Henry Hub gas prices at $4.4 per million British thermal units (mmbtu).
Conclusion
Falling crude prices create profit opportunities for OMCs with higher margins. However, upstream producers like ONGC and Oil India may face earnings cuts in the near term.
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