Global Crude Oil Prices Fall to $70: What Does it Mean for Oil Stocks?

September has yet again proved out to be a tough month for investors with oil bringing the tremours this time. Global crude oil prices have hit a 3-year low, looming around the $70 per barrel mark owing to the cooling demand.

While Brent crude futures have declined by more than 3.5 per cent yesterday, the West Texas Intermediate (benchmark for the US oil market) has already come down to $65.75 per barrel. To dampen the outlook further, Organisation of the Petroleum Exporting Countries' (Opec) latest monthly report has revised the global oil demand forecast for this year to 2.03mn barrels per day, down from the earlier estimate of 2.11mn barrels per day.

Generally, when oil prices fall, it is considered good for India as the country is among the top importers of the commodity. However, the same can turn into a double-edged sword as it can eat up the profit margins of Oil Marketing Companies (OMCs). Nifty oil and gas has already plummeted by nearly 6 per cent in just a single week.

Why Are Oil Stocks Falling?

While D-street analysts believe that the continuous downtrend in oil prices can prove out to be beneficial for Indian OMCs and further help boost the stock performance of these companies, the current picture seems a bit contradictory. For instance, the shares of Oil and Natural Gas Corporation (ONGC) have declined by over 15 per cent on the National Stock Exchange in the past one month.

Shares of Oil India have dropped by more than 14 per cent in the past five trading sessions, and Indian Oil Company (IOC) shares have witnessed a 4.5 per cent decrease in the same period.

ICICI Securities, in its latest report, said that the recent bearish trend in global oil and gas prices could create a favourable margin scenario for Indian oil and gas companies. However, it also highlighted the possibility of a drop in standalone earnings.

"If these low oil prices sustain for any length of time, upstream companies clearly seeing a downgrade of 3 per cent in standalone earnings, which may be exacerbated by a decline in their downstream subsidiaries as well. We note that the effective reduction in net realisations is only $2/bbl, as of now, or less than 3 per cent vs. current estimates. Therefore, the impact on standalone earnings shall not be material, unless crude softens further from here," the report said.

A lot depends on the price trajectory of oil as of now. Brokerage firm Prabhudas Lilladher states that there might be a bounce back in the prices soon. "While upstream earnings are currently impacted, with the OPEC+ delaying its planned rise in production, we expect oil prices to rebound to $75-80 per barrel in the near term. Thus, net oil realization should bounce back to $75 per barrel."

But concerns continue to loom due to a broader play in Opec, which might impact this price trajectory.

Oil's price play

It won't be wrong to say that the price of oil has been quite volatile this year. And even though Opec countries have always been quick to react to price fluctuations, a weaker demand at play coupled with Opec's losing market share seems to have increased the problems for the group.

According to International Energy Agency (IEA), the US has been producing more crude oil than any other country for the past six consecutive years.

Meanwhile, a slowdown in China's economy has led to reduced oil demand from the country. A potential slowdown in the US economy could exert further pressure on oil prices.

As per data from exchanges cited by Bloomberg, the total number of bets on rising oil prices for Brent and WTI crude was cut by 99,889 contracts, leaving just 1,39,242 contracts in the week ending September 3. This is the lowest level of bullish positions recorded since 2011.

As for Indian OMCs, the picture might not be as pessimistic but for downstream companies things can get worse. "For the OMCs, while GRMs (Gross Refining Margin) do see a downturn from FY24, the strong marketing margins help offset some of the pain, although absolute EBITDA still is likely to slip sharply vs. FY24’s record levels," ICICI securities mentioned in its report.

D-street analysts, on the other hand, continues to have an optimistic outlook for Indian oil stocks. "This downward trend in crude oil prices is expected to benefit the Indian Oil Marketing Companies (OMCs), which are currently trading near their highest levels in a year (2024). The decline in crude prices is anticipated to improve profit margins for these OMCs, likely boosting their stock performance," said Rahul Kalantri VP commodities, Mehta Equities.

For domestic investors, all these factors might send out mixed cues in the market as the broader picture remains blurry. It remains to be seen if Indian OMCs can somehow turn the tide in their favour.