Oil and gas stocks saw strong investor interest on Tuesday, June 24, after cooling tensions in the Middle East sent crude prices tumbling. U.S. President Donald Trump announced a likely ceasefire between Israel and Iran, which boosted hopes that the conflict would come to and end.
In the previous session, Brent crude futures closed lower by $5.53 or 7.2 percent at $71.48 a barrel, while U.S. West Texas Intermediate crude (WTI) eased $5.53 or 7.2 percent to $68.51.
Over the past month, shares of downstream oil marketing companies (OMCs) such as Indian Oil Corporation, Bharat Petroleum, and Hindustan Petroleum came under selling pressure as crude prices boiled.
On the other hand, upstream oil companies such as Oil India and ONGC have gained sharply over the past month, rising up to 10 percent.
At 9.17 a.m., IOC shares were quoting Rs 144.93, higher by 3.6 percent, BPCL shares rallied 3.3 percent to Rs 323.85, while HPCL shares jumped 4.5 percent to Rs 411.50 on the NSE.
On the flip side, ONGC shares sank 2 percent to Rs 246.13, while Oil India's stock was down 3.4 percent at Rs 456.1 apiece.
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When crude oil prices rise, shares of oil marketing companies often come under pressure, as their input costs increase but they may not be able to fully pass on the hike to consumers due to pricing regulations or demand concerns - impacting their profit margins.
On the other hand, oil exploration companies such as ONGC and Oil India benefit from higher crude prices, as they earn more per barrel produced while their costs remain largely fixed. As a result, investors expect better earnings from exploration firms, leading to gains in their stock prices.
Earlier, Emkay Global noted that until the average of Brent crude prices stands at $75/bbl, the brokerage does not see any downside to its earnings estimates on HPCL, BPCL and IOCL. The continuation of the current earnings run-rate, reduction in international LPG prices, and payment of LPG subsidy is likely to offer a material upside potential for OMCs.
On the other hand, JM Financial maintained its 'buy' rating on ONGC and Oil India as they are key beneficiaries of high crude prices. According to the brokerage, the current market price of these stocks are discounting $65/bbl crude realisation; every $1/bbl higher oil price boost their EPS by 1.5-2 percent.
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