Oil prices have spiked 10% within the last two days, reversing from $70 per barrel post-ceasefire announcement to $86 per barrel as of early Wednesday trade, with Brent crude up nearly 2%. According to Nomura analyst Bineet Banka, the situation may worsen if Houthi militias activate on the western side at the Bab al-Mandab strait, which accounts for 10-12% of global oil flows and represents 50% of Russian crude oil imports into India and 85-90% of Saudi oil exports. Nomura estimates that elevated crude oil prices are negative for OMCs' marketing margins and city gas distributors' input costs, while positive for upstream realisations in the near term. The brokerage warns that India appears highly vulnerable with dual choke points getting blocked together.
Global brokerage Morgan Stanley has turned significantly more constructive on India's downstream Oil Marketing Companies (OMCs), arguing that Asian refiners are entering a new 'Golden Age' driven by structurally stronger refining margins. According to the latest research, the brokerage believes the market is overestimating future refining capacity additions while underestimating disruptions to existing capacity, creating a tighter supply-demand balance that should support refining margins over the medium term. Morgan Stanley estimates that more than 2.3 million barrels per day of planned refining capacity globally could face delays or operational challenges, keeping product markets tighter than expected. The brokerage also notes that stronger-than-anticipated fuel demand, particularly for diesel, could further support refining spreads, with Asian refiners deriving roughly half of their refining exposure from diesel.
Shares of state-owned oil marketing companies traded higher on Wednesday following Morgan Stanley's bullish outlook, with HPCL leading gains at nearly 2%, while BPCL advanced over 1.1% and Indian Oil Corporation (IOCL) gained more than 1% during the session. The brokerage reiterated its Overweight rating on all three companies while raising target prices across the board. Morgan Stanley now values IOCL at ₹217 (up from ₹202), implying around 58% upside, HPCL at ₹588 (from ₹511), suggesting 52% upside, and BPCL at ₹444 (from ₹385), indicating about 46% upside. However, all three OMC stocks have been under pressure so far this year, shedding up to 21% on a year-to-date basis - IOC down 16.7%, BPCL down 19%, and HPCL down 21.08%.
According to Nomura, OMCs may demonstrate immediate margin impact due to higher crude oil costs amid stable retail prices, with integrated margins of ~$11-13 per barrel including benefits of SAED on volumes procured from independent refiners. The brokerage estimates that a $10 per barrel rise in crude oil prices may cut the combined Ebitda of OMCs by ₹77,000 crore. Additionally, city gas distributors may face a double whammy from higher pricing and shipping costs as 30-40% of their gas mix comes from imported LNG. Nomura maintains a 'Buy' rating and target price of ₹1,640 on Reliance Industries, which could emerge as a beneficiary of structurally higher refining margins in the near to medium term.
According to Morgan Stanley's outlook, investors looking at the Indian oil and gas sector should position themselves downstream to capitalize on strong product margins, with the brokerage seeing more legs to its bullish fuel refining cycle view. The latest developments reinforce Citi's bullish stance on downstream companies over upstream state-owned enterprises, making it strategically advantageous for investors to focus on the downstream segment. As per Morgan Stanley, shares of oil public sector undertakings (PSUs), particularly Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), are likely to remain in focus after the global brokerage reiterated its positive view on downstream oil marketing companies. The combination of softer crude prices, tighter refining markets, and structural improvements in the global refining cycle creates a compelling investment case for Asian refiners entering this new 'Golden Age' of refining profitability.
