Brent crude surge to $90 boosts upstream oil stocks, but upsets paint makers

Oil prices jump as Saudi Arabia, Russia extend supply cuts to end-2023

A spike in Brent crude prices last week to a 10-month high of over $90 a barrel has brought cheers to upstream oil companies with hopes of wider profit margins.

Oil exploration and production companies such as ONGC are direct beneficiaries of a rise in crude prices as it lifts their margins and the overall profitability.

Consequently, shares of ONGC, Oil India and Hindustan Oil Exploration Company shot off 1-5 percent during the week. Shares of oil marketing and refining PSUs such as Indian Oil, HPCL and BPCL too have rallied 2-3 percent in sync since September 1.

Brent crude prices surged around 6.5 percent over the last seven days after major oil producers Saudi Arabia and Russia decided to extend their voluntary supply cuts till the end of the year, fuelling concerns over supply shortage during the peak winter demand.

Brokerage firm Antique Broking expects oil prices to remain in the $78-90-a-barrel range over the next 18 months and Singapore gross refining margins at $7-9 a barrel.

"Upstream crude realisation will continue at a capped price of $75/bbl through FY25 (higher than the earlier assumption of $70/bbl)," it said while upgrading its FY25 earning estimates for ONGC and Oil India by around 7 percent each.

Also Read | Oil jumps as Saudi Arabia, Russia extend supply cuts to end-2023

The company also believes that the cheap valuations of ONGC and Oil India further make the risk-reward favourable for these stocks. On that account, Antique Broking also raised its price target for ONGC by 4 percent to Rs 226 and for Oil India by 3 percent to Rs 338 along with a 'buy' call on both the scrips.

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However, the surge in oil prices also has a negative bearing on companies that are involved in the paint manufacturing business. Paint production relies heavily on petroleum-based raw materials, which make up around 40 percent of the total manufacturing cost. Hence, a jump in oil prices stands to lift the input bill for paint manufacturing companies, putting pressure on their margins and profitability.

Accordingly, sentiment for paint companies has also deteriorated in the past week as oil prices began warming up, resulting in a 1-3 percent fall in Asian Paints, Berger Paints India, Shalimar Paints and Akzo Nobel India.

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