Stocks of oil marketing companies, including HPCL, BPCLAnd CIOgained 2 per cent each on Tuesday after the government announced the second hike in petrol and diesel prices in less than a week, increasing prices by around 90 paise per litre.
The latest hike follows the increase in fuel prices decided by the government up to Rs 3 per liter on Friday. After the fresh hike, the price of petrol in Delhi now stands at Rs 98.64 per liter, compared to Rs 97.77 per liter in Delhi. Diesel now costs Rs 91.58 per liter against the previous price of Rs 90.67, according to a PTI report.
Read also | Petrol and diesel prices increased for the second time in a week; fares increased by almost 90 paise
Kolkata saw the highest increase in petrol prices among the four metropolises, with rates jumping by 96 paise to Rs 109.70 per litre. Diesel prices in the city also increased by 94 paise, reaching Rs 96.07 per litre. In Mumbai, petrol prices increased by 91 paise while in Chennai, petrol prices increased by 82 paise.
The subsequent price hike will likely bring some relief to OMCs that face growing financial pressure as global crude prices remain high due to disruptions caused by the ongoing conflict in West Asia and the closure of the Strait of Hormuz, a narrow 33-kilometer waterway linking the Persian Gulf to the Gulf of Oman that handles more than 20% of the world’s daily oil and gas shipments.
After crossing the crucial mark of 100 dollars per barrel in March, oil price have mostly remained above this year’s level so far. Tuesday morning, Brent crude was trading above $110 per barrel while WTI crude hovered near $108 per barrel.
Are the latest increases in fuel prices enough?
Nomura in a report released after the previous price hike, it pointed out that a mere increase of Rs 3 is significantly lower than the current rate of recovery on a mixed basis. Analysts had noted, however, that this could be the first in a series of fuel price increases, similar to those seen during the Russo-Ukrainian war in 2022.
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“In the current situation, fuel price hikes have been delayed by more than two months due to elections, with the government now opting for a one-off increase of INR 3/litre. If crude prices remain high, this could be the start of further incremental hikes to support OMC margins,” Nomura said, adding that OMCs are trading at a premium to the valuations seen at the start of the Russo-Ukrainian war.
Which MOC is best placed today?
Given the strong cracks in diesel and ATF and the lower exposure to fuel marketing (as a proportion of refining throughput), Nomura believes that IOC will likely be best placed in the current situation. “We believe that high oil prices are here to stay at least in the medium term, and the government may not be able to pass on the increased costs to end users to avoid the fallout of higher inflation. Furthermore, the excise duty cuts of Rs 10/litre taken in March may eventually have to be rolled back once oil prices start to moderate, implying that marketing margins may not return to levels anytime soon. pre-war,” he said.
Nomura believes that IOC’s upcoming refining capacities could help the company outperform its OMC peers, given the strong outlook for refining margins and excess gasoline/diesel production from its own refineries, relative to its marketing volumes.
Read also | IOC Q4 Results: PAT rises 78% YoY to Rs 14,458 crore, revenue rises 7%
The international brokerage firm offers ‘long’ call options on IOC and BPCL shares, but a ‘neutral’ call option on HPCL. At the current rate of embedded losses, Nomura expects HPCL to be the worst hit due to the higher losses it is currently experiencing due to its leveraged marketing exposure. “We estimate that ILC, BPCL and HPCL will completely write down their equity over the next 10.4 and 2 years, respectively, if the current rate of losses continues,” he adds.
(Disclaimer: The recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times.)