Shares of state-run oil marketing companies rallied on Monday after crude oil prices dropped sharply following a reported US-Iran peace agreement and improving supply expectations in the Middle East.
Hindustan Petroleum Corporation Ltd (HPCL) led the gains, rising 5.4 percent. Indian Oil Corporation (IOC) climbed 5.3 percent, while Bharat Petroleum Corporation Ltd (BPCL) advanced 4.7 percent.
Crude prices fall sharply
Oil prices retreated to their lowest levels since March 10.
- Brent crude fell $4.33 to $83 a barrel.
- WTI crude declined $4.54 to $80.34 a barrel.
The decline came after a US-Iran peace agreement aimed at ending tensions in the Middle East and reopening the Strait of Hormuz.
Supply concerns ease
Investors also reacted to expectations that the Strait of Hormuz would reopen.
The waterway carries roughly one-fifth of global oil and LNG shipments. Reduced fears of supply disruptions pushed down the risk premium embedded in crude prices.
That improved sentiment for refiners and oil marketing companies.
Lower crude seen aiding margins
Cheaper crude lowers the cost of raw material for refiners.
If retail prices of petrol and diesel do not fall in line with crude prices, oil marketing companies can retain higher marketing margins. That, in turn, supports profitability.
Cash flow outlook improves
A softer crude market also eases pressure on India’s oil import bill and reduces working capital requirements.
Analysts expect this to strengthen cash flows for oil marketing companies.
Companies with inventories bought at higher prices could also benefit if refined products are sold at relatively stable prices.
Broad-based rally
The combination of lower crude prices, easing geopolitical tensions and expectations of stronger margins triggered buying across the sector.
Stocks that gained on Monday
- HPCL: up 5.4 percent
- IOC: up 5.3 percent
- BPCL: up 4.7 percent
TL;DR:
OMC stocks rallied after crude prices fell sharply following a US-Iran peace agreement and expectations of the Strait of Hormuz reopening. Lower oil prices are expected to support refining margins and improve cash flows, lifting shares of HPCL, IOC and BPCL.
AI summary:
- HPCL, IOC and BPCL rose up to 5.4 percent.
- Crude prices dropped to their lowest levels since March 10.
- A US-Iran peace deal eased concerns over Middle East supplies.
- Reopening of the Strait of Hormuz improved the supply outlook.
- Lower crude prices are expected to support OMC margins and cash flows.
