HPCL, BPCL to IOC: OMC stocks crash up to 9% as crude hits 4-year high on US-Iran war. Should you sell these PSU stocks?

Shares of oil marketing companies (OMCs) fell up to 9% in morning trade on Monday, March 9, after crude oil prices rose to their highest level in four years amid supply disruptions from the escalating conflict in the Middle East.

So far this month, all three OMCs — Hindustan Petroleum Corporation Limited (HPCL), Indian Oil Corporation Limited (IOC) and Bharat Petroleum Corporation Limited (BPCL) — have lost 14-15% as oil PSUs braved the impact of higher crude oil prices, which eat into their earnings.

HPCL shares fell the most, shedding 8.7%, followed by BPCL shares, which declined 7.99%, and IOC shares, which slipped 7.2%.

Oil prices spike

Brent crude oil prices soared as much as 26.4% to $117.16 a barrel, and were last up 23% at $114.08 by 9.15 am. The gains are over and above the 28% rise seen in the oil prices last week due to supply disruption.

The conflict between the US and Iran is showing no signs of de-escalating, and tankers are still not daring to cross the Strait of Hormuz. Investors are bracing for a long stretch of higher energy costs.

Strait of Hormuz is a critical transit point through which roughly 20% of global oil supplies move.

“This is not just an oil price shock; it is also an oil quantity shock. Crude prices have surged nearly 65% in less than seven trading sessions, which is highly unusual. The last time we saw a comparable situation was during the 1970s oil crises, when disruptions in physical supply triggered a structural surge in prices,” said Anindya Banerjee, Head of Commodity and Currency Research, Kotak Securities.

Going forward, there are two broad paths for the oil market, opined Banejee. He said if the Strait of Hormuz becomes operational again and flows normalise, prices could correct sharply as the supply shock fades. However, if the disruption persists for several weeks, oil prices could rise further until they begin to destroy demand by inflicting serious damage on the global economy through inflation, tighter financial conditions, and disruptions to trade and industrial activity, the Kotak Securities analyst warned.

Impact of oil on OMCs

OMCs’ auto-fuel gross marketing margin (GMM) could be hit if Brent sustains above ~USD 70/bbl, as they earn their historical ₹3.5–4/ltr at a Brent price of ~USD 70/bbl.

“For every USD 1/bbl rise in crude price, OMCs' auto-fuel GMM declines by INR 0.55/ltr (assuming no change in retail petrol/diesel price and excise duty on petrol/diesel) and drags down their consolidated EBITDA by 7–9%, with HPCL the worst hit given its highest leverage to the marketing business,” said JM Financial.

The brokerage has a ‘reduce’ rating on all three oil PSU stocks.

UBS, according to a Reuters report, said oil marketing companies are "negatively leveraged" to the crude spike as they sell more diesel and gasoline than they produce, estimating sales-to-production ratios at 1:2 for IOC and BPCL and 2:2 for HPCL.

The brokerage cut IOC and BPCL to "neutral" and BPCL to "sell" from "buy".

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