Oil Marketing Companies (OMCs) Shares Reverses Gains Amid Elevated Crude Oil Prices

On Friday, March 27, shares of Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Limited (HPCL), and Bharat Petroleum Corporation Limited (BPCL) traded up to 2% lower in the morning session. Despite the government's excise duty cut on petrol to ₹3 a litre and exemption of diesel, the stocks reversed morning gains due to elevated crude oil prices.

Market Analysis

Analysts believe that the duty reduction only partly offsets the hit from high global oil prices. Crude oil prices have surged almost 50% since the United States and Israel launched military strikes against Iran on February 28. Brent crude prices remained elevated at $107/barrel, despite US President Donald Trump's statement on talks to end the war with Iran.

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Impact on OMCs

The excise duty cut is seen as a near-term positive for HPCL, BPCL, and IOC. However, investors soon realized that this does not materially reset earnings expectations. Rating agency ICRA estimates that if the average crude oil price goes up to $100-105/bbl, fuel retailers would incur a loss of ₹11 per litre on petrol and ₹14 per litre on diesel, respectively.

Government's Relief Measure

The government's move to cut excise duty on petrol is a strategic fiscal shield that prevents a retail fuel shock and stops OMCs from falling into an earnings abyss. This move floors the downside, protecting the dividend-paying capacity of IOCL, BPCL, and HPCL.

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Government's Revenue Impact

The relief to consumers comes at a ₹1.5 lakh crore hit to the exchequer. Every ₹1/litre cut in excise results in an annual revenue loss of ~₹14,000-16,000 crore.