Rising oil prices, political developments to keep OMC stocks under check

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Oil marketing companies (OMCs) — Hindustan Petroleum Corporation (HPCL), Indian Oil Corporation (IOC) and Bharat Petroleum Corporation (BPCL) – lost up to 8 per cent in trade on Wednesday after reports suggested that the government has asked these OMCs to absorb Re 1 per litre oil price hike.

Even as the government ruled out excise duty cut to cushion the impact of rising crude oil prices, IOC and HPCL, clarified that they have not yet received any instruction from the government to absorb oil price hike.

HPCL was the top loser in this pack, slipping as much as 7.4 per cent to Rs 337.5 levels, its biggest intraday percentage loss since September 13, 2017. BPCL lost 5.6 per cent, while IOC tumbled nearly 6 per cent.

“Crude oil prices can flare up due to trade war fears and geopolitical tensions. OMCs, which were enjoying good marketing margins, may now have to provide for subsidies that will dent theit financial performance going ahead,” says AK Prabhakar, Head — Research at IDBI Capital.

Given the upcoming state elections, he expects OMCs to be asked to absorb price hikes and sees another eight per cent – 10 per cent correction in OMC stocks going ahead.

Oil prices rose more than $2, or over three per cent on Tuesday as investors grew more confident that a brewing trade dispute between the United States and China may be resolved without harming the global economy. In the March 2018 quarter, Brent prices rose nine per cent $67 per barrel, which is 24 per cent higher as compared to the same period last fiscal.

Lower OPEC and Russian supply and strong demand growth from Asian countries kept the prices elevated to average $66.2/barrel in March 2018 alone. OPEC and Russia are looking to extend the production cut for many more years, providing sentimental support to the crude oil price going ahead, analysts say.