Crude oil spikes; what should investors do with BPCL, HPCL, IOC, ONGC & Gail?

Oil prices that saw their biggest intraday spike on September 16 since the 1991 Gulf war are likely to remain volatile, say experts, a cause of concern for India which meets 80 percent of its crude demand through imports.

The Brent crude rallied 19 percent at $72/bbl in intraday trade on September 16 following the drone attacks on Saudi Arabia’s oil facilities over the weekend.

Goldman Sachs said an outage of more than six weeks due to the drone strikes could cause Brent prices to rally above $75 a barrel, though the magnitude of the impact was uncertain at this point.

Any further rise in crude prices may have an impact on the fiscal deficit of India amid fall in rupee against the US dollar. High crude will impact input costs for many industries, impacting earnings and margins.

Industry reports suggest that every $10 a barrel rise in crude prices expands India’s current account deficit (CAD) by 0.4 percent of the GDP. And, every 10 percent increase in crude prices can push up the inflation rate by 20 basis points.

Along with oil marketing companies (OMCs), fertiliser, gas downstream, petrochemicals and paints companies may see pressure on margins. However, it spells cheer for producers like Oil India, ONGC and HOEC by way of better realisations.

“Media reports indicate 2.0-2.3m b/d of output would be restored by 16-Sep’19 but restoring the entire output would take weeks. We believe there is enough crude inventory and spare capacity to supply markets if entire production is restored within a few weeks,” ICICI Securities said in a report.
“Oil price movement would depend on when production is fully restored and whether there are any further attacks. If oil prices surge further it may be positive for ONGC/GAIL but may hurt the investor sentiment in OMCs.”

Assuming 2m b/d of output restarts on September 16 and the balance after 30 days, there will be a shortfall of 3.7m b/d for 30 days, implying a shortage of 111m bbls.

If 111m bbls were to be drawn from inventory, it would reduce Saudi and OECD strategic petroleum reserves (SPR) and commercial crude inventory of 2,367m bbls by just 4.7%, the report said.

The US President has authorised a release from SPR of 630m bbls, if needed (amount to be decided later). OPEC and its non-OPEC allies may increase output from part of their 3.7m b/d spare capacity to make up for the shortfall, if required.

GAIL, ONGC may gain if oil price remains high

ICICI Securities is of the view that high prices for a few months will boost ONGC’s oil and petroleum product realisation and GAIL’s LPG realisation and gas marketing profit.

GAIL makes a high profit on marketing US LNG if Brent is over US$60/bbl. Only risk for ONGC maybe if it has to bear subsidy.

Crude spike negative for downstream companies

The spike crude prices, even though temporary, will be negative for downstream OMCs such as BPCL, HPCL, and IOCL, and Castrol, Kotak Institutional Equities said in a note.

The brokerage firm does not rule out moderation in marketing margins on auto fuels—a US$10/bbl rise in global crude and product prices may require OMCs to increase the retail price of diesel and gasoline by Rs5-6/litre in the following fortnight.

“Sharp jump in global crude prices may also put pressure on refining margins amid slowing demand, besides increasing the absolute quantum of fuel and loss. On the other hand, higher crude prices may be construed positively for upstream PSUs and GAIL,” it said.

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