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ICICI Direct Report
Oil prices have fallen sharply from $95/barrel of oil seen in the first week of November to ~$79/bbl. The decline in crude prices was on account of a number of reasons, from weak demand in China (its Purchasing managers' index fell to a seven-month low of 48), the Europe price cap on Russian oil, to uncertainty on the direction of Federal Reserve's rate hike.
A rise in Covid-19 cases in China led to stringent restrictions in the country although they have started relaxing these restrictions to a certain limit.
The Europe and G7 nations have agreed on a price cap of $60/bbl for seaborne Russian oil. The recent release of strong services data in the U.S. raised concerns that the Federal Reserve would increase interest rates more aggressively.
The correction in prices would have a dual impact on oil marketing companies (although overall positive impact). Firstly, OMCs would incur onetime inventory loss (on gross refining margins front) due to the impact of falling oil prices on existing inventory.
Secondly, and more significantly, we expect the performance of the marketing segment to improve owing to lower losses on the diesel front.
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