HPCL, BPCL, and IOCL: OMC Shares Surge by Up to 5% as Crude Oil Prices Drop Below $70; Emkay Highlights OMCs’ Favorable Position

On March 6, shares of Indian oil marketing companies (OMCs) experienced a significant increase as Brent crude oil prices fell below the $70 per barrel threshold, marking a three-year low. This drop in oil prices led to a surge in stocks for Bharat Petroleum Corporation Ltd. (BPCL), Hindustan Petroleum Corporation Ltd. (HPCL), and Indian Oil Corporation Ltd. (IOC), with their shares rising up to 5 percent.

BPCL rose by 3.2 percent to reach ₹264.20, HPCL climbed 4.8 percent to ₹342.30, and IOC increased by 3.7 percent to ₹126.75 on the BSE.

Brent falls as OPEC+ plans to roll back production cuts

The decline in crude prices coincided with OPEC+ revealing its intentions to gradually reverse voluntary production cuts. The group plans to reintroduce 2.2 million barrels per day (mbpd) of crude to the market over the next two years, which represents 38 percent of the 5.9 mbpd supply cuts implemented since 2022.

Although the decision was largely expected, Emkay Global Financial Services suggests that the falling crude prices are advantageous for India’s OMCs, although the effect on upstream producers like Oil and Natural Gas Corporation (ONGC) and Oil India may be limited.

As of today, Brent futures were trading up by 39 cents, or 0.56 percent, at $69.69 per barrel by 0416 GMT, while U.S. West Texas Intermediate crude (WTI) futures gained 39 cents, or 0.59 percent, to $66.70 a barrel.

Brent declined by 6.5 percent over the previous four sessions, reaching its lowest point since December 2021, while WTI decreased by 5.8 percent during the same period, hitting its lowest level since May 2023.

OMCs poised for increased margins as crude prices decline

Emkay Global observed that Brent prices at $70 per barrel could place OMCs in a “sweet spot,” allowing them to earn higher marketing margins on auto fuels.

At this level, the gross marketing margins for diesel and petrol are approximately ₹8 and ₹12 per liter, respectively, which Emkay believes is enough to compensate for losses of about ₹250 per cylinder on LPG sales.

While there are apprehensions regarding potential cuts in retail fuel prices or an increase in excise duty, Emkay anticipates government support, including a possible ₹200 billion LPG subsidy, as suggested by statements from the petroleum ministry and OMC executives.

For upstream producers ONGC and Oil India, Emkay forecasts a 6-9 percent reduction in earnings if crude prices linger in the $70-75 per barrel range. However, the brokerage pointed out that these stocks have already adjusted in expectation of lower realizations, minimizing the risk of further decline.

Despite potential earnings adjustments, Emkay has kept its target prices for ONGC at ₹270 and Oil India at ₹510, implying upside potential of 20 percent and 40 percent, respectively, from current market levels.

Additionally, strong production performance may boost these stocks. ONGC’s oil production rose by 1.5 percent year-on-year in January, aided by its KG 98/2 asset, while Oil India’s gas output increased by 7 percent. Nonetheless, overall crude oil production remained flat, expanding just 1 percent year-on-year.

Conversely, GAIL’s petrochemical and gas marketing divisions might encounter challenges due to lower crude prices, as its petrochemical realizations are tied to oil prices. Furthermore, the spread in GAIL’s U.S. LNG sales may narrow due to stable Henry Hub gas prices at $4.4 per million British thermal units (mmbtu).

Nevertheless, Emkay holds an optimistic stance on GAIL, highlighting the forthcoming pipeline tariff increase as a significant catalyst. The brokerage believes that the company’s current valuations remain appealing, despite short-term hurdles.

Sector Outlook: OMCs favored amidst crude price fluctuations

While dropping crude prices raise worries over upstream realizations, Emkay maintains a positive outlook on the sector, listing its preferences as OMCs first, followed by upstream producers and GAIL. The brokerage believes that attractive valuations and supportive government policies could help mitigate short-term oil price volatility.

With Brent crude expected to remain in the $70-75 per barrel range, India’s oil marketing companies are likely to maintain profitability, whereas upstream producers and gas firms may face short-term margin constraints.

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