Oil and Gas stocks rebounded on Tuesday, June 24 as US President Donald Trump announced a surprise ceasefire between Israel and Iran.
The Nifty Oil & Gas index gained ground as oil prices crashed for the second straight session. Brent crude, which had surged on fears of escalating conflict, has now fallen more than 12 per cent over two sessions, down 8.5 per cent on Monday and another 4 per cent today, as the announcement sparked hopes that the worst of the crisis may be over.
Brent Crude, as of the time of filing this report, was trading at $66.81 per barrel, after touching a low of $66.74. After the war started on June 13, it had surged to 14.25 per cent from $69.36 to touch the recent high of $79.25.
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The dramatic turnaround came just hours after Iran launched a missile strike on a US military base in Qatar in retaliation for American airstrikes on its nuclear sites. The attack had almost led investors to anticipate a wider conflict in the region, however, Trump's surprise declaration of the ceasefire calmed some nerves on the D-Street.
Israeli Prime Minister Benjamin Netanyahu said in a statement posted by his office on Tuesday that his country had accepted the US-initiated ceasefire after achieving its goal of neutralising Iran’s nuclear and missile threat. Iranian state media, too, confirmed that a ceasefire was in effect, as per a Reuters report.
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Nifty Oil & Gas Index Bounces Back
The Nifty Oil & Gas, which tracks the performance of the sector, surged as much as 1.26 per cent in today’s trade. On the day the conflict began (June 13) the index slipped had over slipped over 1.8 per cent to touch a low of 11,318.10. From this level, it has now climbed back up to touch an intraday high of 11,618.85, recovering over its pre-war level.
Leading the index, downstream oil company Hindustan Petroleum (HPCL) share price climbed as much as 5.5 per cent in early trade. Following it, Bharat Petroleum (BPCL) share price and Indian Oil (IOCL) share price surged up to 4.6 per cent and 3.8 per cent, respectively.
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However, these downstream oil companies’ shares pared some of the initial gains around mid-session. Accordingly, the Nifty Oil & Gas index, too, shed gains to trade around 0.15 per cent higher, as of 12:45 PM. Weighing the index further were upstream oil companies’ shares such as ONGC and Oil India, which slipped as much as 3 per cent and 4.9 per cent, respectively.
Lower oil prices raises concerns about weaker earnings from oil production for upstream oil companies. In contrast, downstream oil companies benefit from lower crude oil prices as cheaper oil prices can lead to improvement in their margins and profitability.
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What Analysts Say
Analysts at Kotak Securities said lower oil prices are generally negative for upstream companies, but ONGC could still benefit due to its exposure to gas production. “Higher oil prices are positive for upstream. The benefit is higher for ONGC, as it also gets higher gas prices for NWG — around 20% of its production is priced at a 12 per cent slope to oil prices,” the analysts said in a recent note.
On the other hand, oil marketing companies (OMCs) like IOC, BPCL, and HPCL stand to gain from falling crude prices, as their retail fuel prices remain largely frozen. “With prices of retail fuels (83–85 per cent of volumes) frozen, OMCs are an inverse oil play. With oil prices declining — average $67/63 per barrel in April and May — OMCs’ marketing margins were very high,” the analysts added.
The brokerage firm’s note also pointed out that while there had been expectations of a retail price cut earlier, rising geopolitical tensions now make that unlikely. “If retail prices were cut, a reversal would have been difficult. But if the conflict eases soon, margins may further rise. While OMCs’ near-term earnings will remain strong (despite the oil price spike), our key concerns remain on the lack of pricing power and large capex,” the note said.
