OMC, paint stocks in focus as crude rises to 4-month high

Oil marketing companies (OMCs), which have so far weathered the impact of rising crude prices, may come under pressure in the near term if crude keeps rising, experts have said.

Crude price touched a four-month high amid Ukrainian drone attacks on Russian refineries and OPEC supply cuts and is nearing $87 a barrel.

Lower crude exports from Iraq, Saudi Arabia and signs of stronger demand and economic growth in China and the US has also pushed crude prices higher.

These Russian outages and extended OPEC+ output cuts have pushed Morgan Stanley to raise its Brent oil price forecasts by $10 to $90 for the third quarter of 2024.

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Rising prices may strain OMCs like Indian Oil Corporation (IOC), Bharat Petroleum Corp Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL) as they face higher costs in sourcing crude for refining into petrol and diesel.

As crude prices surge, OMCs may find it challenging to fully pass on the cost hikes to consumers, given government regulations or market competition.

The government’s recent decision to slash petrol and diesel prices by Rs 2 a litre, combined with escalating crude prices could further squeeze OMCs’ profit margins.

Motilal Oswal expects a negative stock price reaction for OMCs in the near term, given the retail price cut and recent elevated Brent crude prices.

The brokerage has a “buy” rating on HPCL and IOCL and a “neutral” call on BPCL. As the impact of the Red Sea crisis on crude oil and refining GRMs wanes, marketing margins can recover to above Rs 3, the brokerage said.

Morgan Stanley said the auto fuel price cut should finally remove key overhang. The brokerage prefers Indian Oil, which has the highest refining exposure. “HPCL may see a negative near-term impact on integrated margins and one should look to accumulate the stock on corrections,” Morgan Stanley said.

On the contrary, CLSA has a “sell” call on all three leading OMCs-HPCL, BPCL and IOC. “Margin on diesel is now below fair levels and this cut challenges the optimistic narrative of the government. Stock price baking in much higher than long-term average refining and marketing margins,” it added.

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Stocks of paint manufacturers like Akzo Nobel India, Berger Paints, Indigo Paints, and Shalimar Paints may also come under pressure. as crude derivatives are key raw materials for them, accounting for almost 40 percent of the input bill for paint manufacturers. A rise in the price of crude can mean narrower profit margins.

Upstream oil exploration firms like ONGC benefit from higher crude prices. Oil drilling companies might also find their services in greater demand, sometimes even commanding premium rates.

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