Oil Stocks Outlook
for the week – 01 to 05.08.2016
(PSU refiners seen
positive, oil prices eyed)
The shares of state-owned oil refining companies Indian Oil
Corp Ltd, Bharat Petroleum Corp Ltd,
and Hindustan Petroleum Corp Ltd are likely to trade with a
positive bias next week, given the fresh
weakness in crude oil prices and likelihood of strong
Apr-Jun earnings for these companies. Earnings
are expected to be better on hopes of high inventory gains.
The positive mood is attributable to a muted outlook for crude prices. This implies healthy B/S
(balance sheet), and product demand at lower end-prices, resulting in sustained and higher marketing
segment profits.
We expect stock prices to peak with 1Q results; a correction
will follow on weak GRM (gross refining margins), allowing a fresh entry point. In the absence of
any major sectoral trigger, the trend for downstream as well as upstream oil companies over the next
few sessions will be determined by the movement in crude oil prices as well as sentiment in the
broad market.
Crude oil futures on domestic as well as global exchanges
are likely to extend losses into the third
straight week with increasing worries over excess supply of
crude oil and refined products. Crude oil
prices fell to an over 14-week low today, to 2,737 rupees
per barrel on the Multi Commodity
Exchange of India, and were at $40.69 a bbl on the New York
Mercantile Exchange.
The US Energy Information Administration reported that US
crude oil inventories rose by an
unexpected 1.7 mln bbl in the week ended Friday. The market
had projected a 1.6-mln-bbl decline.
Petrol stocks rose by 500,000 bbl despite this being the key
summer driving season in the US. For upstream players such as Oil and Natural Gas Corp Ltd,
Oil India Ltd, and Cairn India Ltd, a rise
in crude oil prices will have a negative impact as these
entities produce and sell the commodity. On the other hand, a gradual decline in crude prices is a positive
for refiners, as it is the primary input for
them, but downstream companies take a hit if the decline in
oil prices is sharp, as it leads to inventory
losses for them.
The oil marketing companies are scheduled to revise fuel
prices on Sunday. Although it is a routine
exercise, the price revision may have some sentimental
impact on Monday. The shares of the three oil
marketing companies are already in the overbought zone but
there are no signs of weakness yet and
the rally might continue in the immediate-to-near term.
Among the three stocks, Indian Oil is the top pick and could
appreciate by another 10% over the next
7-10 sessions, and may also see a breakout early next week
at around 500-rupee levels. Fluctuation in
the dollar-rupee exchange rates is also likely to affect
shares of downstream and upstream oil
companies. If the dollar strengthens against the rupee, it
will hit refining companies and benefit
upstream players. A weak dollar, on other hand, will help
downstream companies, as India primarily
relies on imported crude oil to meet its requirements.