Cooling crude prices brings respite to OMC stocks; IOC, BPCL, HPCL rally up to 4%

Cooling crude prices brings respite to OMC stocks; IOC, BPCL, HPCL rally up to 4%

On October 5, there was a notable development in the Indian stock market related to the oil and gas sector. Crude oil prices experienced a sharp decline during intra-day trading, providing relief to oil-marketing companies (OMCs).

Stocks of prominent OMCs like Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL) showed significant gains, with their stock prices surging by 1-4 percent on the Bombay Stock Exchange (BSE). This surge can be attributed to the favorable movement in crude oil prices, as lower oil prices typically reduce the input costs for these companies, thereby positively impacting their profitability.

In contrast, stocks associated with oil exploration, such as Oil India, Indraprastha Gas, Petronet LNG, and Oil and Natural Gas Corporation (ONGC), traded relatively flat. This divergence in performance suggests that the decline in crude oil prices primarily benefited OMCs, while oil exploration-related companies did not experience the same level of positive market movement.

At the time of this report, the S&P BSE Sensex was up by 235 points or 0.3 percent, reaching the 65,461 level as of 10:30 am. This indicates a positive overall sentiment in the broader stock market on that particular day.

According to a report from the US Energy Information Administration (EIA), the energy market experienced notable shifts in gasoline supplies and crude oil inventories. Finished motor gasoline supplies, which are often used as a gauge for gasoline demand, dropped to a yearly low of 8 million barrels per day (bpd). This decline indicates a reduction in the demand for gasoline, which can be influenced by various economic and societal factors, including travel patterns and fuel efficiency.

Additionally, the EIA report highlighted that crude oil inventories decreased by 2.2 million barrels during the week ending on September 29, marking the lowest level seen since December 2022. Crude oil inventories serve as a critical barometer of the oil market’s health, reflecting factors such as production, imports, and consumption.

These developments had a substantial impact on oil prices. Brent Crude prices dropped by 9 percent on October 5 compared to their highs in September, while WTI Crude prices experienced an even steeper decline of 11 percent. These price fluctuations were likely driven by the combination of reduced gasoline demand and shrinking crude oil inventories, underlining the sensitivity of oil markets to supply and demand dynamics.

In addition to the supply and inventory dynamics, economic news also played a role in putting pressure on oil prices. The report mentions that the U.S. services sector experienced a slowdown in September, with the non-manufacturing Purchasing Managers’ Index (PMI) falling to 53.6, down from 54.5 in August. A lower PMI can indicate a deceleration in economic activity within the services sector, which can have implications for overall economic growth and, consequently, oil demand.

Looking ahead, Rahul Kalantri, Vice-President of Commodities at Mehta Equities, anticipates continued volatility in crude oil prices. He suggests that crude oil prices may find support in the range of $82.8 to $81 per barrel, with resistance levels at $84.5 to $85.3 per barrel. In terms of the Indian rupee, he notes that there is support at levels of Rs 6,940 to Rs 6,870, while resistance is expected around Rs 7,120 to Rs 7,200. These support and resistance levels provide insights into the potential price movements of crude oil in the coming period, taking into account both international factors and the currency exchange rate.

Over the past three months, oil marketing company (OMC) stocks, including those of Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL), and Hindustan Petroleum Corporation (HPCL), have faced downward pressure due to rising crude oil prices. These stocks have experienced declines of up to 11 percent during this period. In contrast, the broader S&P BSE Oil & Gas index saw a much smaller decline of 0.4 percent.

Analysts at Prabhudas Lilladher have expressed the belief that losses in marketing margins for these OMCs are likely to persist in the July-September quarter of FY24 (Q2FY24). One of the key factors contributing to these losses is the OMCs’ inability to raise retail fuel prices in tandem with the increase in crude oil prices.

The brokerage firm’s analysis indicates that the gross marketing margin on petrol and diesel in September 2023 stood at Rs 5.5 per litre and a loss of Rs 3.8 per litre, respectively. This is in contrast to higher margins of Rs 10.6 per litre for petrol and Rs 10.2 per litre for diesel seen in Q1FY24, as well as Rs 8.4 per litre for petrol and Rs 2.7 per litre for diesel in Q2FY24 year-to-date. These figures illustrate the challenges faced by OMCs in maintaining their profit margins amidst volatile crude oil prices and the pressure to keep retail fuel prices affordable for consumers.