Oil marketing shares gush gains as JPMorgan gives sector the thumbs-up

Shares of oil marketing companies (OMCs) rose on November 28 after JPMorgan upgraded the sector as crude oil prices softened.

Stocks of Indian Oil traded up over two percent at Rs 75, Bharat Petroleum over three percent, and Hindustan Petroleum four percent to Rs 235. Even upstream companies like Oil India and ONGC racked up gains.

Analysts at JPMorgan feel good days are coming for OMCs that have suffered from high crude oil prices and the government’s effort to keep fuel prices low.

"We turn more constructive on Indian OMCs as we expect the oil price to stabilise with some downside risks, and policy support has turned positive,” said Pinakin Parekh, an analyst at JPMorgan.

He upgraded Hindustan Petroleum to overweight from underweight with target of Rs 285. He is also overweight on Indian Oil with a target of Rs 100, adding that he prefers downstream to upstream oil companies now.

Hindustan Petroleum is one of the worst performing energy stocks in the current calendar year. Analysts now believe 2023 should see a change in operating performances which in turn should drive stock performance

“OMCs are profitable on an integrated basis until Brent crude oil is less than $95 per barrel (bbl) and we do not see Brent sustaining above $100 per bbl in 2023 and the risk is to the downside. Gross margins on petrol are well above historical averages, LPG is profitable and, on diesel, implied losses have come off sharply,” said Parekh.

Brent crude oil prices traded down nearly three percent over the previous day’s price at $81 levels. The commodity has lost over 37 percent from highs of March 2022.

Meanwhile, Parekh downgraded GAIL to neutral as they sees loss of Gazprom cargoes translating into a lack of earnings visibility across trading and petrochemical segments. He also sees LPG outlook as weak.