PSU Oil Stocks Display Resilience Amid Rising Crude Oil Prices

Oil Marketing Companies Show Resilience Amid Rising Crude Prices

Shares of oil marketing companies (OMCs) demonstrated resilience in the face of rising crude oil prices, with a minimal 1.5% decline on Monday, despite a nearly 7% surge in Brent futures. The losses were led by Bharat Petroleum Corporation (BPCL), which shed 1.55%, while Indian Oil Corporation Limited (IOCL) and Hindustan Petroleum Corporation Limited (HPCL) stocks fell by less than 1% each.

The limited decline in OMC stocks can be attributed to the fact that oil prices remained below $100 per barrel, despite the recent spike. Additionally, OMCs have fallen 16-22% from pre-war levels, suggesting that analysts believe the worst is priced in.

Market analysts attribute the cautious market reaction to two primary factors. Firstly, the market is treating the latest crude jump as a volatility event, rather than a new equilibrium. Secondly, policy cushioning is expected to mitigate the impact of rising crude prices. The Indian government's decision to cut the special excise duty on petrol to ₹3 a litre from ₹13 and on diesel to zero on March 27 is seen as a buffer against crude price increases.

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Global Oil Prices Surge 7%

Globally, oil prices jumped 7% as investors grappled with conflicting messages about the war in Iran and news that the Strait of Hormuz was closed again. In early Asian trading, Brent crude futures surged to $96.85. The escalation of tensions in the region has disrupted crude and gas shipments, impacting oil PSUs' margins.

OMC Stocks Outlook

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The conflict in the Middle East has impacted oil PSUs' margins, with retail fuel prices frozen despite the spike in oil prices. According to ICICI Securities, a natural floor for prices is $85-90/bbl, substantially higher than pre-war levels of USD 70/bbl. This is expected to support gross refining margins (GRMs) over the next 12-18 months.

While product prices are expected to remain strong due to product tightness, softened crude costs will allow retail marketing margins to turn positive while keeping GRMs elevated. The government's previous excise duty cut provides a buffer for crude price increases of up to $20/bbl, while potential improvements in propane availability could moderate prices and help reduce LPG losses.

OMCs are currently trading below their 20-year average P/E and P/B ratios, suggesting limited downside and high conviction for investors. Motilal Oswal Financial Services believes that OMCs still have room to run as margins normalize higher, with a breakeven oil price for MS/HSD marketing margins at $85-90/bbl at mid-cycle GRMs.