By all indications, crude oil prices are likely to be subdued in the near-term. Brokerages are cutting down growth estimates left, right and centre. Goldman Sachs Group Inc. has cut its growth estimates for the US for the second half of the year. Morgan Stanley, too, cut its global growth forecast for the year. Slower growth would have an adverse impact on oil demand and, thus, on prices. Earlier this month, the Organization of the Petroleum Exporting Countries (Opec) cut oil demand growth forecast.
“We highlight that IEA’s (International Energy Agency’s) most recent forecasts estimate global crude oil demand to increase by 1.2 million bpd (barrel per day) in CY2011E and 1.6 million bpd in CY2012E based on global GDP growth at 4.2% in CY2011E and 4.4% in CY2012E. However, incremental oil demand estimates dip sharply to 0.9 million bpd in CY2011E and 0.6 million bpd in CY2012E at lower global GDP assumption of 2.8% in CY2011E and 3% in CY2012E,” pointed out analysts from Kotak Institutional Equities in a note to clients last week.
Falling crude oil price is generally good news for India. For one, the so-called under-recoveries (losses on selling fuel below market prices) will come down. In that light, let’s see which stocks are likely to find favour with investors. It’s good for the state-owned oil marketing companies (OMCs)—Hindustan Petroleum Corp. Ltd, Bharat Petroleum Corp. Ltd and Indian Oil Corp. Ltd—that the overall under-recoveries for the sector will be lower than earlier anticipated.
But the profitability of these companies depends on how much support they will eventually get from the government and the upstream companies. All the three firms posted net losses in the June quarter. Moreover, investors are aware that the subsidy sharing mechanism is uncertain. Having said that, companies that offer discounts to the OMCs—Oil and Natural Corp. Ltd (ONGC), Oil India Ltd (OIL) and Gail (India) Ltd—are likely to benefit more when crude oil prices decline.
That’s mainly because their absolute subsidy burden would decline, assuming there are no major negative surprises in the subsidy sharing proportion. This could lead to an improvement in ONGC’s net realizations. Also, if ONGC’s FPO (follow on public offer) pricing comes at a discount to the prevailing market price like other such issues, it would be a good opportunity for retail investors to enter the stock. Though, for ONGC, the decline in domestic production remains a concern.
Lastly, when it comes to crude oil, it’s difficult to resist mentioning Cairn India Ltd. Unfortunately, it’s been quite a lose-lose situation for Cairn India investors. When crude prices were moving up, since the end of last year, the stock was surrounded by the Cairn-Vedanta Resources Plc deal overhang, and now, when the closure for the deal looks in sight, crude oil prices are treading lower, at least in the near term.
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