Brent Crude Prices Reach New High of $82 Per Barrel: Impact on OMCs' Margins and Earnings

Indian Oil Marketing Companies Face Pressure from Elevated Crude Prices

Indian Oil Corporation (IOC), Hindustan Petroleum Corporation (HPCL), and Bharat Petroleum Corporation (BPCL), the state-run oil marketing companies (OMCs), are likely to face a negative impact on their auto fuel marketing margins due to elevated crude oil prices. The recent US-Israel attacks on Iran and the counterattacks by Tehran have driven crude oil prices to multi-month highs, reaching $82.24 per barrel for Brent and $75.5 per barrel for West Texas Intermediate.

Impact on OMCs

Rising crude oil prices put pressure on OMCs, as crude constitutes the bulk of their input costs. Higher crude prices increase the overall expense of refining and fuel production, potentially compressing marketing margins. If petrol and diesel pump prices are not revised upward in proportion to the increase in crude, OMCs may face pressure on their earnings.

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Impact on Earnings

A $5 per barrel rise in Brent crude would increase the earnings per share of ONGC and Oil India by 7% and 12%, respectively. However, OMCs are particularly vulnerable to elevated crude prices, which can compress refining margins, increase operating and working capital requirements, and lead to higher borrowing costs and debt levels.

Market Reaction

Domestic brokerage JM Financial expects HPCL to be the worst-hit given its highest leverage to the marketing business. It has a 'reduce' rating on all three OMC stocks. A prolonged closure of the Strait of Hormuz would likely lead to a further surge in oil prices, with some analysts seeing oil crossing $100 per barrel.

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India's Exposure to Energy Shock

According to estimates by JM Financial, every USD 1 increase in crude raises India's annual import bill by approximately USD 2 billion. Prolonged tensions may increase logistics and marine insurance costs, disrupt Gulf shipping routes, and pressure the trade balance. The Indian rupee faces a near-term depreciation bias, with potential RBI intervention through foreign exchange reserves.