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Oil prices near 26-month high, OMCs and aviation stocks decline

LiveMint logoLiveMint 27-09-2017 Nasrin Sultana

Mumbai: Shares of oil marketing companies (OMCs) and aviation firms have declined this month as oil prices rallied which could dent their margins.

Shares of Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd were down 11-12% in September, whereas exploration companies like Oil India Ltd and Oil & Natural Gas Corp. Ltd rallied 22.25% and 9.27% this month.

As fuel accounts for around half of expenditure for Indian carriers, a rise in fuel price is not good news for aviation companies. Except SpiceJet Ltd (up 4.24%), Jet Airways (India) Ltd and Interglobe Aviation Ltd were down 14-16% this month.

An oil analyst who did not want to be named said, “Higher crude prices have impacted diesel marketing margins of OMCs. Current levels of crude prices require Rs2-3 per litre hike in petrol and diesel prices to mitigate the loss.”

According to Bloomberg data, Brent crude prices were up 10.46% in this month. Brent oil prices were hovering near 26-month high hit on Wednesday on supply worries amid threats from Turkey that it could cut crude exports from Iraq’s Kurdistan region. Brent crude was 1% down on Tuesday, after earlier hitting $59.49, its highest since July 2015 and more than 34% above a 2017 low.

However, analysts at Motilal Oswal Securities Ltd said in a report on 20 September that with a clear indication from the ministry to not meddle in the pricing of auto fuels, the stage appears set for an increase in marketing margins, albeit small and gradual. “With deregulation, the companies could focus more on their core performance, resulting in improved refining margins. Additionally, the threat of market share loss has not been significant, although it is an issue in the longer term,” the report said.

Rise in oil price may also effect input cost for many companies which rely on fuel. “If oil prices stay at structurally elevated levels, input costs of companies will increase. It will also lead to a high import bill which may impact the current account deficit of the country. Overhang of a depreciating rupee will be a double whammy for the economy,” said Mayuresh Joshi, fund manager, Angel Broking Ltd.

Reuters contributed to the story.

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