What’s fuelling oil marketing companies' stocks?
Bharat Petroleum Corp Ltd (BPCL), Hindustan Petroleum Corp Ltd (HPCL) and Indian Oil Corp Ltd (IOCL). Investors are excited about the subdued outlook for crude-oil prices and expectations of a strong December quarter on the back strong marketing margins even as refining margins have softened sequentially. Prices of Brent crude have dropped from a recent high of around $95 a barrel in September and are now hovering around $77.
For now, concerns that crude prices will rise in the near term have been mitigated. In a meeting on 30 November, Opec+ agreed to cut oil production by about 2.2 million barrels a day for the first quarter of 2024. Opec+ comprises the Organization of Petroleum Exporting Countries (OPEC) and its allies, including Russia.
Oil prices have not reacted meaningfully to the news even thought the cuts amount to roughly 2% of global supply. One reason for this could be that the cuts are insufficient to counter the growth in non-Opec output. Concerns about a weakening global economy also continue to weigh on the market.
Falling crude prices have a positive effect on OMCs’ profits as they reduce input costs and raise marketing margins. It also helps that earnings are expected to be strong this financial year. “FY24 turning out to be a blockbuster year for OMCs with strong dividends," analysts from Emkay Global Financial Services wrote in a report on 24 November.
“ "After a robust first half of the year, the second half has been better than expected for OMCs, except for some intermediate inventory losses likely in Q3 if oil prices stabilize at $80-85 a barrel. This would, however, mean strong core earnings in Q4," they added. In the six months to September (H1FY24), HPCL and BPCL profits surpassed any of their
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