Mumbai: The drone attacks on Saudi Arabia’s oil infrastructure, which hit 5-6% of global oil supplies, have expectedly resulted in soaring oil prices. Brent crude futures were up 10.8% at $66.7/barrel at the time of writing.

Investors in Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd should have been counting their petrodollars. After all, every $1 increase in Brent crude prices results in a 2.5-2.9% increase in annualised earnings per share for these companies, according to calculations by Jefferies India Pvt. Ltd. Monday’s $6.5 rally in crude prices should, by that estimate, result in a 16-19% boost to their earnings.

But despite this huge tailwind, ONGC and Oil India’s shares gained only 1.4% and 0.3% respectively on Monday. In comparison, Hong Kong listed shares of Petrochina Co. Ltd and CNOOC Ltd rose 4.3% and 7.4% respectively on Monday. As it is, ONGC shares trade at only about six times estimated earnings for the current fiscal. With oil prices spiking by over 10% and experts estimating that an increase in geopolitical risk will keep prices elevated, it’s surprising that investors aren’t expecting any gains for India’s oil producers. Evidently, the worry is that these companies’ gains will be re-routed to help the government balance its budgets in some way.

But the worries may be overdone, especially since petrol and diesel are no longer subsidised. “We see only limited risk of subsidy burdens returning on India's state-owned oil companies, leaving ONGC and Oil India as beneficiaries... With petrol and diesel out of the subsidy mix, the fiscal impact of higher prices is also manageable," said analysts at Jefferies in a note to clients.

Still, the fact that investors are restraining themselves from pricing in the gains from higher oil prices is telling.

Meanwhile, shares of state-run Indian oil marketing companies (OMCs), Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL) fell by 5.7% and 7% respectively, while shares of the more diversified Indian Oil Corp. Ltd (IOCL) fell by a little over 1%.

Given the weak global economic environment, investors are worried whether product prices will keep pace with the increase in the price of feedstock. “The refining environment could turn challenging if product prices do not track crude price changes amid sluggish demand. For India's OMCs, any likely increase in Middle East premiums could hurt as well - especially for the lighter grades that would likely get impacted from Abqaiq," points out Jefferies. Indian OMCs use the lighter grades produced in Saudi as feedstock in their refineries.

In addition, there is the risk of a fall in their marketing margins. The last time crude had spiked, these companies were effectively told to curtail their marketing margins, to prevent a sharp increase in the price of auto fuels. “We do not rule out a possibility of moderation in marketing margins on auto fuels—a US$10/bbl rise in global crude and product prices may require OMCs to increase retail price of diesel and gasoline by Rs5-6/litre in the following fortnight," analysts at Kotak Institutional Equities wrote in a note to clients.

As such, while shares of ONGC may not have risen enough, shares of OMCs may not have fallen enough. Of course, investors will get a better sense of the impact over the next few weeks as product prices adjust to the reality of the new supply shock.

According to International Energy Agency’s estimates, even before the current disruption in supply, there was expected to be a shortfall in supply in the second half of 2019. “The incremental disruption of 5.7 million barrels per day (~6% of global oil supplies) from Saudi, even if for a short period, will accelerate the anticipated drawdown in global inventories," analysts at Kotak say.

While the supply shock is expected to offset partly by tapping into strategic reserves of countries and commercial stocks, only time will tell how far the shock can be absorbed. In any case, higher crude prices are a reality investors have to live with. “This attack has material implications for the oil market, as a loss of 5 million barrels per day of supplies from Saudi Arabia cannot be met for long by existing inventories and the limited spare capacity of the other OPEC+ group members. A geopolitical risk premium will return to the oil price," said Alan Gelder, vice president for Refining, Chemicals and Oil Markets, Wood Mackenzie, a global energy, chemicals, renewables, metals and mining research and consultancy group.

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