In a much-needed breather, oil prices tumbled over 5% on Wednesday. Brent crude futures dropped $6.21, or 5.9%, to $98.28 a barrel by 0058 GMT, after touching a low of $97.57. U.S. West Texas Intermediate crude futures fell $4.67, or 5.1%, to $87.68 a barrel, having slipped earlier to $86.72.Downstream stocks usually come under pressure when oil prices rise, as their input costs increase sharply while their ability to pass these costs on remains limited. These companies buy crude at higher prices, refine it, and sell the end products, but pricing is often regulated, restricting full cost pass-through to consumers. As a result, margins get squeezed when product prices do not rise in line with crude.
Iran’s latest statement allowing non-hostile vessels to pass through the Strait of Hormuz signals a notable shift from the de facto blockade seen in recent weeks. In the early phase of the conflict, the IRGC had adopted a far more aggressive stance, issuing radio warnings that no ships would be allowed to transit. While it stopped short of a formal blockade, the group had warned that any vessel entering the Strait could be set ablaze.
Sensex, Nifty today: Catch all the LIVE stock market action here
What are analysts saying?
Earlier this month, international brokerage firm UBS downgraded the three counters following mounting uncertainty over rising crude oil prices amid US, Israel-Iran war. The international brokerage revised target prices to Rs 175 for IOCL from Rs 190, Rs 365 for BPCL from Rs 425, and Rs 340 for HPCL from Rs 540.
Rising geopolitical tensions and the recent surge in crude prices have created uncertainty around earnings for Indian state-owned oil marketing companies, drawing parallels with the oil market disruption seen in 2022, UBS analysts said.
Given their higher dependence on fuel marketing, these companies also face pressure when profits shift from marketing to refining. Reflecting this, marketing margin estimates for FY27 and FY28 have been cut by 43-45% and 22-26%, respectively. From a market standpoint, the biggest losers are likely to be oil refiners, downstream companies and gas players. Elara Securities notes that beyond $110 per barrel, the buffer begins to wear thin.
Oil marketing companies such as HPCL, BPCL and Indian Oil are the most vulnerable, the domestic brokerage said in a note earlier this week. Higher gross refining margins may offer some cushion, but they are unlikely to fully offset the hit from shrinking retail margins and rising LPG losses. At current Brent levels of around $100 per barrel, earnings could decline sharply, in the range of 90% to 190%, unless there is a fuel price hike, tax cuts or higher LPG subsidies.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)