New Delhi: No sooner than crude oil prices have cooled down a bit, oil stocks are back in favour. And they find some supporting voices too.
Take ONGC Ltd for example. As a state-owned enterprise ONGC needs to share the oil subsidy burden and hence, rising crude prices will only add pressure to its financials. The stock has been on the losing streak ever since crude prices started their northward journey. It lost one-fifth of its value since October last year.
However, with Brent crude oil prices back at $108 levels, there is an increasing belief that markets are pricing in much pessimistic scenario in the ONGC stock. According to Sandeep Randery and Nilesh Ghuge, analysts at BRICS Securities, the current ONGC stock price is pricing-in long-term crude oil prices of $138 a barrel.
Note Sandeep Randery and Nilesh Ghuge:
We believe under-valuation of ONGC stock reflects a highly pessimistic outlook for oil prices, retail fuel prices increases and ONGC’s subsidy burden. Assuming upstream companies bear one-third of petroleum subsidy burden and retail fuel prices remain unchanged, we estimate ONGC is pricing in $138 a barrel long term international oil prices. We believe the scenario being price in….. is highly unlikely.
Another reason why they believe markets are overtly pessimistic on ONGC stock is the assumption that crude prices are unsustainable at current levels. BRICS Securities analysts argue that demand destruction kicked-in every time value of oil consumption as a percentage of global GDP crossed 4%. According to their calculations, at current pries, the current oil consumption as a percentage of global GDP stands at around 6%. They think this is unsustainable.