Shares of oil marketing companies (OMCs) are likely to see a significant boost, driven by favorable fundamentals, with downstream firms expected to outperform their upstream counterparts, according to a recent analysis by Citi.
Saurabh Handa, Citi’s Director of India Oil and Gas and Telecom, highlighted that the previous quarter was challenging due to elevated oil prices, weakened refining margins, and fuel price reductions. However, Handa noted that these factors are showing signs of reversal. “If the current trends continue, we anticipate that the second quarter will surpass the first, with the third quarter potentially showing even greater improvements,” he said.
Another potential positive driver for the sector is expected to come from liquefied petroleum gas (LPG). Citi forecasts that the Indian government will provide grants to OMCs to offset losses from liquefied natural gas (LNG) by the third quarter of the financial year. “The current conditions suggest a favorable outlook for OMCs, with a potential rally on the horizon,” Handa added.
Regarding crude oil prices, Citi maintains a neutral to bearish stance due to geopolitical uncertainties and less supportive fundamentals. Handa pointed out that, “Post-summer, oil prices might struggle to maintain levels around $80 per barrel.”
He noted that while crude oil prices remain around $75 per barrel, earnings for oil marketing companies are relatively stable. However, if prices rise above this threshold, there could be increased risks and a potential reassessment of earnings, particularly for upstream companies. “We are not at that point yet,” Handa emphasized.
Overall, the outlook appears more promising for downstream companies compared to their upstream peers, according to Citi’s analysis.
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