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OMCs’ shares fall as OPEC talks of output reduction.

Date: 13-11-2018
Subject: OMCs’ shares fall as OPEC talks of output reduction
Indications from the OPEC that it would cut the output of crude oil by 1 million barrels per day starting January sent stocks of oil marketing companies (Indian Oil, BPCL and HPCL) crashing on Monday and brokerages downgraded their stocks. For instance, Axis Capital in a report on Monday downgraded stocks of these three firms to ‘sell’ from ‘hold’.
In the three months to September 2018, OMCs reported a decrease in year-on-year net profit owing to low gross refining margins and foreign exchange losses. While BPCL reported a 48% lower profit in the quarter, HPCL witnessed a 37% and Indian Oil around 12% decline in the net profit.
Axis Capital noted that government intervention and volatile crude oil prices are the two main concerns affecting OMCs. “While oil prices have cooled down recently, we do not see volatility ending here – if crude was to resume its upward journey, threat of government intervention in an election year would resurface,” it said.

Rising crude oil prices and a weakening rupee are seen as risks for OMCs as it leads to an increase in domestic retail fuel prices. Crude oil prices were up 46% year-on-year in the September quarter, whereas the rupee was down 9%.
Despite diesel and petrol prices being deregulated, the government asked OMCs on October 4, 2018 to absorb `1 for each litre of the fuel sold. Axis Capital added that government intervention, if any, will impact marketing margins earned by OMCs, thus crippling a segment that contributed a significant 23-40% of group Ebitda in the deregulated regime.

Though OMCs calculate daily fuel prices based on prices of international petroleum products, these are linked to international crude oil prices. The Brent crude softened from more than $80 per barrel at the start of October to below $70 per barrel, but bucked its four-day losing trend to breach $71 per barrel on Monday.
A cut in crude oil production ups prospects of an increase in global crude oil prices, which weighed on the share prices of Indian oil companies as the BSE Oil and Gas index lost 1.94% on Monday, compared with the Sensex, which was down 0.98%. The biggest losers among the Indian oil firms were the OMCs, with HPCL losing 6.23%, followed by Indian Oil (-4.59%) and BPCL (-1.87%) on the BSE.

On Monday, Saudi energy minister Khalid al-Falih said in Abu Dhabi that the OPEC and its allies agree that there is a need to cut the oil output by around 1 million barrels per day starting January from the October production level. He added that the cut was required in order to balance the markets and prevent inventory pile up as demand is likely to fall. The OPEC nations contribute more than 40% to global crude oil production.
The announcement also comes at a time when India’s oil imports from its third-largest supplier Iran has now been restricted to 1.25 million tonne per month till March 2019 as per a waiver given by the US on the face of sanctions on the Persian Gulf country. India imported around 22 MT of oil, or 10% of its requirement, from Iran in FY18.

Apart from the OMCs, the shares of ONGC (-0.29%), Oil India (-0.33%), and GAIL (India) (-0.75%) also fell on the BSE. Though a high crude oil price is good for national explorers as their realisation per barrel goes up, analysts believe that it also increases the chance of them sharing the burden of subsidy.
HDFC Securities in a note earlier this month had said, “Concerns over subsidy sharing with OMCs due to elevated oil prices will keep stock price (of ONGC) under pressure.”
From nearly 60% in FY15, the share of ONGC and Oil India in petroleum subsidy declined to 10% in FY16 and further to nil in FY17.

Source: financialexpress.com

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