Shares of oil marketing companies (OMCs) are likely to be on investors’ radar when the Indian stock market resumes regular trading on Wednesday, November 11, as international crude oil prices have fallen to a three-month low amid diplomatic efforts to end the Middle East conflict.
Brent crude fell towards $90 per barrel on Tuesday, extending losses from the previous session and touching its lowest level since late August. The decline came after US President Donald Trump played down the prospect of additional military action against Iran, easing fears of prolonged supply disruptions in the Middle East. The possibility of a global supply glut also remained in focus.
Traders are assessing whether a potential breakthrough in peace negotiations between the US and Iran could ease supply-chain disruptions that have persisted since the conflict began. The crisis had pushed inflation in developing economies to multi-year highs and prompted central banks to raise interest rates.
The three state-run OMCs — Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL) and Indian Oil Corporation Ltd (IOC) — have started November on a strong note, gaining between 10% and 13.5% so far, supported by the sharp retreat in crude oil prices.
Trump signals pause in Iran strikes; crude prices retreat
Trump said on Monday that he planned to hold off on further military strikes against Iran following appeals from countries in the region, including Qatar’s prime minister. However, market participants remained cautious about the announcement, given that Trump had made similar statements in the past before military action resumed.
Brent crude has retreated around 23% from the six-month high of $118 per barrel touched on October 30, as concerns that Trump could intensify attacks on Iran following the US midterm elections have eased. However, the possibility of shipping disruptions remains a concern.
Trump acknowledged that the Iran war had affected the midterm election results, suggesting that voters were frustrated by surging gasoline prices resulting from the more than eight-month-long conflict.
Democrats secured major electoral gains in the midterm elections, including victories in key gubernatorial races.
How falling crude oil prices benefit OMCs
A decline in crude oil prices generally benefits oil marketing companies, as crude accounts for a significant portion of their input costs. Lower crude prices reduce the overall cost of refining and fuel production.
If petrol and diesel retail prices are not reduced in proportion to the decline in crude oil prices, OMCs can retain higher marketing margins, directly supporting their profitability.
Softer crude prices also help lower India’s oil import bill and ease the working capital requirements of OMCs, potentially improving their cash flows. Moreover, companies can benefit from inventory gains when they sell refined products at prevailing market prices that are higher than the cost of their previously purchased crude inventory.
Disclaimer: We advise investors to check with certified experts before making any investment decisions.
