In view of the upcoming elections in some states in November-December, oil marketing companies (OMCs) might reduce the prices of petrol and diesel by 4-5 rupees per litre from August.
JM Financial Institutional Securities stated in a report that the valuation of oil companies seems reasonable, but there is significant uncertainty over earnings in the fuel distribution business. The strong price-setting power of OPEC plus could increase the price of crude oil over the next 9-12 months.
Oil companies are hoping that the price of crude oil will remain below $80/barrel, although this will depend entirely on the under-recovery fully offset by the government for fiscal year 2023.
The report said the valuation of OMCs is reasonable, but earnings could be at risk from a sharp bounce in the price of crude oil during the election. If the price of Brent crude exceeds $85 and there is any reduction in fuel prices, oil companies could be at risk, as the likelihood of a reduction in fuel prices during the election is quite low.
The report mentioned that there is a risk of an increase in crude oil prices. OPEC plus, seeing its strong price-setting power, will continue to support the price of Brent crude at $75-80 per US barrel, which is the fiscal breakeven crude price for Saudi Arabia.
Considering the elections in major states in November-December, oil companies might be asked to reduce the price of petrol/diesel by 4-5 rupees per litre from August, as OMCs’ balance sheet is largely rectified and there is a possibility of recording strong profits in FY24. However, the report did not mention the timing and magnitude of the potential reduction. It will depend on what the price of crude oil is and what the position of the rupee is against the dollar.
