The Nifty Oil & Gas index has largely remained flat over the past year, struggling to give returns amid a labyrinth of geopolitical disturbances. The latest trigger, which came from the ongoing US-Iran conflict, has kept global energy markets disrupted and weighed heavily on oil marketing companies (OMCs).
Since the war between the two countries began on February 27, the Nifty Oil & Gas index had plunged as much as 13.7 per cent at one point before recovering partially in recent weeks. Even after the rebound, the index still trades around 6 per cent below its pre-Iran war levels.
It is worth noting that the Nifty Oil & Gas index is not a pure-play OMC index. The benchmark comprises 15 companies across oil exploration, refining, gas transmission, and fuel marketing businesses, including both upstream and downstream energy firms.
The decline had come amid concerns over disruption in the Strait of Hormuz, one of the world’s most critical oil shipping routes that carries over one-fifth of global oil demand. Fears of supply disruption pushed crude oil prices significantly higher, with Brent crude futures surging nearly 75 per cent from their earlier lows before cooling off below the $100 per barrel mark recently.
Elevated crude oil prices had significantly strained the profitability of oil marketing companies, particularly as domestic retail fuel prices remained unchanged for nearly four years despite a sustained rise in global energy costs.
Fuel Price Hikes Improve Sentiment
Hikes in petrol and diesel over the past two weeks have lifted sentiment around OMCs, after a prolonged period of uncertainty. Retail fuel prices have been raised multiple times since May 15, leading to a sharp cumulative increase within a short span. The steady upward adjustment has helped improve expectations around OMC margins, which had been under pressure due to elevated crude oil costs.
Mayank Jain, market analyst at Share.Market by PhonePe said the performance of OMCs mainly depends on the difference between global crude oil prices and domestic fuel prices.
“Earlier this year, when Brent crude crossed the $100–$110 per barrel mark due to Middle East supply issues, OMCs faced heavy losses as they had to keep retail fuel prices low,” he said.
He added that the recent hikes are helping companies recover lost marketing margins, as higher pump prices allow partial offsetting of costly crude imports. At the same time, easing global crude oil prices have further reduced input cost pressures, improving the overall profitability outlook for the sector.
According to Jain, another major positive is the restoration of investor confidence. The government’s decision to allow fuel price pass-through after years of frozen rates has reassured the market about the sector’s earnings visibility.
OMC Stocks Rebound, Still Below Pre-War Levels
During the rally in crude oil prices, shares of major OMCs saw huge corrections. However, the recent fuel price hikes have triggered a strong rebound in these stocks.
Since May 15, Hindustan Petroleum Corporation Ltd (HPCL) has gained around 10 per cent, Bharat Petroleum Corporation Ltd (BPCL) has recovered about 8.40 per cent, while Indian Oil Corporation Ltd (IOCL) has bounced back nearly 7 per cent.
However, HPCL is still down nearly 8 per cent from pre-war levels, while BPCL and IOCL are lower by around 20 per cent and 23 per cent, respectively.
Is It Time To Invest?
Analysts say the recent correction in OMC stocks may offer an opportunity for long-term investors, especially if crude oil prices remain stable or decline further.
Historically, OMC stocks tend to perform better when crude oil prices soften while retail fuel prices remain elevated, as this helps improve marketing margins. The sector also benefits when government intervention in fuel pricing remains limited, allowing companies greater flexibility in passing on higher costs to consumers.
At current levels, valuations of several OMCs have become relatively attractive compared to their historical averages following the recent correction. This has prompted investors to revisit the sector after months of underperformance.
However, experts caution that risks still remain. Any fresh escalation in geopolitical tensions or another sharp spike in crude oil prices could once again pressure margins and weigh on investor sentiment.
