HPCL, BPCL, IOC Stocks Drop Up to 6% as Crude Oil Prices Rebound Amid Rising Middle East Tensions

The stock prices of India’s top state-owned oil marketing companies—Hindustan Petroleum Corporation Ltd. (HPCL), Bharat Petroleum Corporation Ltd. (BPCL), and Indian Oil Corporation Ltd. (IOC)—saw a notable decline on Thursday, October 3rd, amidst a surge in crude oil prices due to rising geopolitical tensions in the Middle East. The ongoing instability in the region has led to concerns over the potential disruption of oil supplies from one of the world’s most critical production areas, pushing up oil prices globally.

HPCL, which had been on an eight-day winning streak, saw its shares fall, while BPCL and IOC experienced their second consecutive day of losses. The decline has raised concerns among investors who are watching closely for how these companies will navigate through the dual challenge of rising crude oil prices and the pressure to maintain competitive retail fuel pricing.

Despite the recent downward trend, both HPCL and IOC have recorded significant gains in 2024, with IOC shares up 32% so far this year. However, the recent rise in crude oil prices may offset these gains if the oil companies are forced to reduce retail fuel prices or face narrower marketing margins.

The price of Brent crude futures increased slightly by $0.34, settling at $72.08 per barrel, while U.S. crude rose by $0.27, closing at $70.10 per barrel. The marginal increases in crude oil prices come in response to concerns over potential supply disruptions. However, a significant build-up in U.S. crude inventories has tempered these gains, limiting the upward movement of oil prices.

Probal Sen, an analyst at ICICI Securities, expressed concerns over the shrinking refining margins and the possibility of retail fuel price cuts, which could further erode the profitability of oil marketing companies (OMCs). According to Sen, if retail fuel prices were cut by ₹3-4 per litre, it would significantly impact OMCs' already thin margins, particularly if crude prices continue to rise.

Adding to these challenges, Mukesh Kumar Surana, Chairman of HPCL, highlighted that the situation has changed drastically over the past few days. The company's refining margins have been negatively impacted by the sharp drop in gross refining margins (GRMs), and the risk of inventory losses looms large, especially if oil prices continue their upward trajectory.

Brokerages such as JM Financial have noted that the recent fall in oil stocks like Oil India and ONGC presents a buying opportunity, with the long-term outlook for these companies remaining strong. Oil India, in particular, is expected to see a robust 30% growth in production over the next 1-3 years, aided by an expansion in refining capacity. On the other hand, OMCs face a more uncertain outlook, with their marketing margins coming under pressure.

JM Financial has maintained a 'Sell' rating on HPCL, citing concerns about its ability to sustain current valuation levels, with a target price of ₹150 per share. BPCL, on the other hand, has been rated as a 'Hold,' with a target price of ₹340 per share, reflecting the mixed sentiment around OMCs' profitability amidst rising oil prices and ongoing capital expenditure plans.

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As of Thursday afternoon, HPCL’s market capitalization stood at ₹88,911 crore, BPCL at ₹1.52 lakh crore, and Indian Oil’s valuation fell to ₹2.42 lakh crore. Despite the short-term challenges, investors remain cautious about the long-term impact of fluctuating crude oil prices on these companies' profitability.