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Informist, Friday, Feb 28, 2025

MUMBAI - The near-term outlook for oil stocks is negative with foreign portfolio investors continuously selling their equity investments and earnings of oil marketing companies in the March quarter seen to be weak, analysts said. FPIs net sold shares worth INR 24.30 billion of oil, gas, and consumable fuel companies in the first fortnight of February, up from INR 3.69 billion the previous fortnight, according to data available on the National Securities Depository. As of Feb. 25, FPIs had net sold equities worth INR 356.93 billion in the overall market. The impact of FPI selling has been mitigated to an extent by the inflow of funds from domestic players.

The oil marketing companies are likely to face near-term headwinds due to softer refining margins, weaker gross marketing margins, and continuing liquefied petroleum gas under-recoveries, Prabhudas Lilladher said in a sector update Tuesday. The average Singapore gross refining margin--considered a benchmark of the oil refining industry--has fallen to $2.5 per barrel till date in the March quarter from $5 per barrel in the previous three months. The gross refining margins have started improving since mid-February, but they continue to remain below the long-term average of $5.1 per barrel, the brokerage said. 

Oil refiners have been consistently absorbing the LPG under-recoveries since September 2023 due to high propane prices and subsidised retail rates, Prabhudas Lilladher said. For the nine months ended Dec. 31, Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp. had aggregate under-recoveries of INR 300 billion. Prabhudas Lilladher expects these losses to continue in the March quarter due to high propane prices, with an estimated under-recovery of INR 200 per cylinder, the brokerage said. 

India is likely to increase its energy imports from the US to mitigate the impact of the latter's reciprocal tariff policy. But oil imports from the US are likely to be at higher prices, and the appetite for these imports will not be that high, Kotak Institutional Equities said in a research report. However, India's liquefied natural gas imports from the US have increased on arbitrage compared to the oil-linked prices and the share of US LNG imports is likely to rise further, it said.

India gained around INR 7 billion per year through its import of cheap crude oil from Russia, according to an International Monetary Fund report. Currently, with the reduction of discounts on Russian crude, India's overall crude costs are at a similar premium to Dubai crude prior to the Russian invasion of Ukraine. With the increased costs, the refining margins of the oil marketing companies have come down significantly, Kotak Equities said.

US crude is not preferred by Indian refiners as it is relatively sweeter, lighter, and needs longer transportation time. US crudes have generally been $7-$8 per barrel costlier than Russian crude. The increased intake of US crude will further weaken the refining margins of downstream players, the brokerage said.

In the December quarter, the aggregate net profit of oil marketing companies that are part of the Nifty 200 index fell 17.8% on year, missing the Street's expectation of an 11% on-year rise in net profit, according to Informist's analysis. On revenue, oil marketing companies performed better than the Street's estimates with revenue falling over 2% in the December quarter. Analysts had estimated the aggregated revenue to fall more than 10% on year. For oil producers, aggregate net profit fell 2.6% on year, missing the Street's expectation of a 1.5% rise. However, their revenue growth was above estimates with more than 5% growth, also beating the near 3% growth projected for the sector.

Brent Crude oil futures were volatile during the week, falling in the first half and recovering in the latter half. At 1508 IST, Brent Crude futures on the Intercontinental Exchange were down 0.7% at $73.49 per barrel. The rupee has depreciated during the week and closed at INR 87.49 per dollar.

The Nifty Oil & Gas index closed 2.2% lower at 9590.60 points Friday, with all 15 constituents in the red. The index fell nearly 5% this week. All major oil stocks fell during the week, with Hindustan Petroleum and Oil India being the major laggards.

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Following are the resistance and support levels for the sector's key stocks for next week, as per calculations based on their prices on the National Stock Exchange:

End

Reported by Akshay V. Johnson
Edited by Rajeev Pai

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