ONGC, Cairn India Shares Rise amid Crude Price Spike

Shares in state-run oil refiners have come under selling pressure amid a sharp rise in global crude prices, which jumped over 4 per cent last week on account of a sudden eruption of violence in Iraq. Oil prices can spike sharply if the conflict threatens oil refineries south of Baghdad, analysts say.

India imports around 75 per cent of its oil need and state-run refiners are compensated by the government for selling diesel, kerosene and LPG at below market subsidized rates. However, both the refiners and upstream companies also have to share this subsidy burden.

So, when crude prices go up, or when the rupee becomes weaker, as is the case now, state-run oil companies are hit.

Refiners such as BPCL, HPCL and Indian Oil have shed 4-5 per cent over the last five sessions as compared to a 2 per cent drop in the Nifty benchmark.

Despite the headwinds, Deutsche Bank on Tuesday advised investors to buy ONGC, Oil India, HPCL and BPCL citing hopes of reforms by the Modi-led government.

"State-owned companies will be key beneficiaries of reform measures. Expect potential upside of up to 22 per cent from current prices," the investment bank said.

Meanwhile, oil explorers such as ONGC gained today as higher oil prices will lead to margin expansion and inventory gains for these firms.

Oil India and ONGC shares rose 1.4 per cent, while Cairn India was up 1.7 per cent.

Traders pointed out that shares of ONGC and Oil India are pricing in a scenario where 90 per cent of the subsidy burden would be borne by them. However, the expected reforms such as reduction in diesel subsidy could bring down the subsidy burden on these companies.


(With inputs from Reuters)