Crude oil prices sink to 9-month low: HPCL, BPCL, other OMCs poised for earnings boost

Crude oil prices slumped to their lowest since December on Wednesday, extending a steel fall of more than 4% in the previous day, amid concerns over lower global demand growth. Expectations of a deal to resolve the political dispute between rival factions in Libya that cut output by about half and curbed exports also weighed on the crude oil prices.

Brent crude futures for November fell 0.53% to $73.36, after the previous session’s fall of 4.9%. US West Texas Intermediate crude futures for October were down 0.63% at $69.90, after dropping 4.4% on Tuesday.

Analysts believe that oil fundamentals are deteriorating sharply, even as the market obsesses about potential supply shocks.

According to Nirav Sheth, CEO - Institutional Equities, Emkay Global Financial Services, concerns around oil demand will be the dominant narrative for oil prices, eventually pulling the floor beneath the support, at $70 or so.

Key reasons

While OECD demand has been contracting in 2024, even non-OECD demand has started slowing down. The world’s biggest consumer China is seeing shrinking oil consumption since early 2024 as its economic mess and rapid electrification present structural headwinds to oil prices, Sheth noted.

Moreover, OPEC’s share of global oil production has slipped, from nearly 60% in 2012 to 49% in H1CY25, while non OPEC members — accounting for 51% of revenue — are benefiting from the increased OPEC compliance without bearing any cost.

“They are, in fact, gaining incremental volumes. It is only rational to assume that OPEC will shift to defending the market share – which means price will be the casualty,” Sheth said.

Emkay Global believes ‘lower for longer’ oil and commodity prices will dominate the investing theme in the near and medium terms.

“Accompanying the lower interest rates, stable Current Account Deficit (CAD) and rupee will underpin our rather bullish view on India’s macros. Funneling down to the best investing ideas demands respect for valuations too,” Sheth said.

Impact on OMCs

The earnings of Oil Marketing Companies (OMCs) are usually a function of refining margins and a top up with marketing margins.

“In a free market scenario, OMCs will be able to maintain their marketing spread even as oil and refining margins variate to global demand-supply. However, OMCs have kept their retail prices (indexed to oil at $85/bbl and normal GRMs) unchanged over the last 28 months (outside a brief cut pre-elections), implying that earnings are linked to oil and refining margins sliding up or down. For captively refined oil, the integrated margins remain the same,” Sheth said.

Simply, OMCs with lower degree of refined integration will have higher leverage to earnings from lower crude and refining margins.

Hindustan Petroleum Corporation Ltd (HPCL) refines about 6 mt of crude and markets about 12.5 mt (14.5 billion liter) of liquids every quarter, with refining-to-marketing ratio at about 45%.

For Q1FY25, HPCL reported GRMs of $5.8 per liter and marketing margin of about ₹4 per liter. Every $2 drop in crude oil positively impacts marketing EBITDA by nearly ₹1,500 crore. Marketing margins on petrol and diesel which were ₹4.7 per liter and ₹3.8 liter in Q1, increased to ₹5.3 per liter and ₹3.1 liter in July, to ₹9.3 per liter and 7.6 per liter in August, and are presently anchored at about ₹14 a liter and ₹13 a liter, according to Emkay Global.

“We should expect OMCs’ earnings to blow out over the next two quarters, despite expectations of retail price-cuts and/or excise-duty increases. More importantly, we believe that regulatory intervention will be a light touch at best, if oil prices grind lower, as we argue. This should positively impact valuations,” Sheth said.

At 12:15 pm, HPCL share price was trading 3.40% higher at ₹440.05 apiece, Indian Oil Corporation shares were trading 0.43% higher at ₹176.85 apiece, while BPCL share price was trading 0.23% higher at ₹356.35 apiece on the BSE.

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