Fuel hike not enough to offset all losses, oil stocks fall further

Shares of oil marketing companies extended losses on Friday, shrugging off the retail fuel price hike of ₹3 per litre, as this increase was insufficient to offset losses from elevated crude levels. Shares of Bharat Petroleum fell 3.6%, Hindustan Petroleum declined 2.9%, and Indian Oil Corporation dipped 4.1% on Friday. The Nifty and Sensex ended 0.2% lower.

“The recent ₹3 hike offers only partial relief, and their margins are likely to remain under pressure until geopolitical tensions ease and crude prices moderate,” said Sonam Srivastava, founder and fund manager at Wright Research PMS. “A fuel price increase of nearly ₹20 per litre would be required to fully offset these losses, which appears unlikely at this stage,” she said.

Brent crude futures advanced 2.5% to $108.37 on Friday evening. Oil prices have rallied 53% since the start of the West Asia conflict.

At current crude prices, oil marketing companies are incurring losses of up to ₹1,200 crore per day on petrol, diesel and LPG, said Srivastava. Shares of these OMCs have been under pressure this year, as oil prices soared from $60-70 to over $100 in a span of a few days since the start of the US-Iran conflict at the end of February.

Hindustan Petroleum, Bharat Petroleum, and Indian Oil Corporation have declined 19-27% this year, compared to Nifty’s 9.6% fall. “Given the losses currently being incurred by oil marketing companies, the market was expecting a fuel price hike of 10-15%, and the increase announced has fallen short of expectations,” said Anita Gandhi, head of institutional broking at Arihant Capital. “There is now anticipation of another price revision over the next 15 days, which will determine the near-term direction for these stocks.”

More fuel hikes may be on the way. “We believe the government could raise fuel prices by up to ₹30 per litre over the coming months,” said Apurva Sheth, head of research at Samco Securities.Sheth said investors can wait for better entry points in these stocks.

Others are more wary of this sector.

Divam Sharma, co-founder and fund manager at Green Portfolio PMS, said the government is currently focusing on managing consumer price inflation rather than maintaining the OMC margins.

“We would want to stay away from OMCs till we see Brent crude cooling to below $90,” he said.

Gandhi of Arihant said that it is advisable that investors should remain on the sidelines and await greater clarity before taking fresh positions in OMCs. “Moreover, there is no clarity with respect to the end of the war, which means oil prices can remain elevated in the near term,” she said.