Why HPCL, BPCL, IOC stocks are surging today
What's the story
Shares of oil marketing companies (OMCs) such as Hindustan Petroleum Corporation (HPCL), Bharat Petroleum Corporation (BPCL), and Indian Oil (IOC) surged by as much as 4% on Friday. The spike came after the Indian government announced a reduction in the special additional excise duty on petrol to ₹3 per liter and eliminated it for diesel. The decision was announced through a government order on Thursday.
Market reactions
Nayara Energy raised fuel prices ahead of government intervention
The government's decision comes a day after India's largest private fuel retailer, Nayara Energy, raised petrol prices by ₹5 per liter and diesel by ₹3 per liter. The price hike drew concerns from dealers over its potential impact on demand and possible protests. Some dealers also reported that fuel supplies had been curtailed in recent days.
Market recovery
Fall in crude oil prices
The surge in oil prices eased a bit early on Friday, which is also expected to be a positive tailwind for the battered OMC stocks. Brent crude futures fell by over 1% to $106.7 per barrel while WTI Crude futures also fell by over 1% to $93 per barrel. The decline in oil prices comes as brokerages had predicted margin pressures due to rising crude oil prices and slashed their target prices for OMCs.
Stock downgrade
Ambit Institutional Equities downgraded OMCs to 'Sell'
Ambit Institutional Equities downgraded the shares of oil marketing companies such as HPCL, BPCL, and IOC to 'Sell' and cut their target prices by 45% to 57%. The brokerage firm believes that $80 per barrel is the new normal for Brent crude oil due to factors such as infrastructure damage, geopolitical risk premiums, and inventory restocking.
Future predictions
Limited government relief for state-run OMCs
Ambit also predicts that the political reality post-2024 Lok Sabha elections and fiscal pressures from a sharp depreciation of the rupee will limit government relief for state-run OMCs. The firm expects any knee-jerk correction in Brent crude or government action of ₹1 to ₹2/liter increase in retail selling price (RSP) as triggers to exit OMCs.