Global brokerage firm Citi has expressed a strong preference for India's downstream oil marketing companies (OMCs) over upstream state-owned enterprises, driven by a favorable macroeconomic environment of soft crude oil prices and robust refining margins. According to a recent research note, Citi highlighted that the current market dynamic is heavily skewed in favor of downstream players.
While global crude oil supply remains relatively resilient-keeping crude prices on the softer side-global product balances have tightened significantly. This tightening is supporting elevated refining cracks, which is a measure of the difference between the cost of crude oil and the price of the refined products extracted from it.
A Sweet Spot for OMCs
The combination of cheaper raw materials (soft crude) and higher selling prices for finished products (high refining cracks) bodes exceptionally well for the integrated margins of OMCs. Within the downstream space, Citi has ranked Indian Oil Corporation Ltd. (IOCL) as its top pick, followed by Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL).
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Upstream SOEs Face Different Pressures
Conversely, Citi remains cautious on upstream state-owned enterprises (SOEs) like the Oil and Natural Gas Corporation (ONGC). Beyond missing out on the downstream refining boom, ONGC has recently been called upon for "national service". Following directives from the government, the upstream giant is tasked with developing a Strategic Petroleum Reserve (SPR) facility, which requires significant capital allocation and focus outside its core exploration and production activities.
Citi's outlook suggests that investors looking at the Indian oil and gas sector should position themselves downstream to capitalize on strong product margins, avoiding the upstream segment where government mandates and softer crude prices present potential headwinds. This comes as global crude oil prices continue to trade amid high volatility over US-Iran conflict.
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