Shares of state-run oil marketing companies (OMCs) picked a sharp rally on Wednesday, April 8, surging upto 10% intraday after global crude oil price crashed 15% on the 15-day US-Iran ceasefire deal. Hindustan Petroleum Corporation (HPCL) led the surge, rising over 10%, followed by Bharat Petroleum Corporation (BPCL), which rose more than 8%, and Indian Oil Corporation (IOC), up over 7%. The rally tracked a sharp crash in global oil prices, with Brent crude due for May delivery pluging 6% at $103 per barrel.
The West Texas Intermediate (WTI), which correlates more with the US economy and markets, took the higher crash, with deep cuts of almost 15% to trade at $96 per barrel. Oil prices slumped following US President Donald Trump's announcement of a two-week temporary 'double-ceasefire' deal, just hours after he threatened to end the Iran civilisation. Mediated by the Pakistani government, Trump confirmed that he ordered US troops to call off the ongoing military strikes in the Gulf nation.
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Why are OMC stocks surging in trade?
This comes after a sustained period of volatility in global oil markets, owing to continued unrest in the Middle East and the closure of the Strait of Hormuz, a key route that handles one-fifth of global oil supply. Iran's foreign minister Seyed Abbas Araghchi had also confirmed that safe passage through the Strait of Hormuz during the two weeks may be possible, provided the US halts all attacks on Iran.
The development is major boost for blue-chip OMCs and downstream stocks such as BPCL, IOCL, HPCL as a drop in crude oil prices reduces their input costs. On the other hand, the US-Iran ceasefire deal is a fundamental negative for India's upstream oil companies such as ONGC, and Oil India, which plunged 5% intraday each. The change in global crude prices directly increases their revenue per barrel, lifting profit margins.
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Will the rally continue?
The US-Israeli war with Iran saw the steepest monthly oil price rise in history in March of more than 50%. Shares of IOC, BPCL, and HPCL are down upto 6% on a year-to-date basis. The spike in crude has severely dented the marketing margins for OMCs. Domestic brokerage Elara Securities warned that without timely retail price hikes, earnings for OMCs could see a steep decline of 90-180%, highlighting the vulnerability of the sector to sustained high crude prices.
Nomura highlighted that a marginal hike in aviation-turbine-fuel prices is likely to hurt OMCs. At current prices, the brokerage estimates that OMCs would lose around Rs 64 per litre on domestic ATF sales, implying a marketing loss of approximately $109 per barrel on such sales. ATF accounts for only 2-6% of total marketing volumes for OMCs. However, similar to petrol and diesel retailing, OMCs dominate the ATF market with a share of over 90%. Analysts say the trajectory of oil prices and any government-led price adjustments will be critical in determining near-term earnings recovery.
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