Crude Oil Price Drop Boosts Paint Stocks and OMCs But Hits ONGC and Oil India

The recent fall in Brent crude oil prices has sent ripples through the stock market, creating both winners and losers. While oil marketing companies (OMCs) and paint manufacturers are enjoying gains, the same decline has negatively impacted the shares of upstream companies like Oil and Natural Gas Corporation (ONGC) and Oil India.

How OMCs and Paint Companies Benefit from Falling Crude Prices

For OMCs such as Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL), and Indian Oil Corporation Limited (IOCL), the decline in crude prices is a welcome relief. When crude prices drop, these companies see a reduction in their input costs, allowing them to improve their profit margins. Furthermore, OMCs benefit from inventory gains when they replenish stocks at lower prices, leading to higher profitability. The reduced cost of fuel also tends to boost consumer demand, which can translate into increased sales volumes and revenue growth.

On September 4, shares of OMCs responded positively to these favourable conditions. HPCL saw the most significant gains, rising by 3.5% to a record high of Rs 442.50 on the National Stock Exchange (NSE). BPCL and IOCL also experienced gains in the range of 1% to 3.5%.

Similarly, paint stocks shone brightly as they also benefited from the lower crude prices. Companies like Asian Paints, Indigo Paints, Shalimar Paints, and Berger Paints India saw their shares rise by 1.5% to 5%. Since crude derivatives are a key input in paint production, lower crude prices reduce raw material costs, giving these companies the ability to expand margins and potentially pass on cost savings to consumers.

Negative Impact on Upstream Companies: ONGC and Oil India

Conversely, the same drop in crude prices has not been as favourable for upstream companies such as ONGC and Oil India. These companies, which are primarily involved in oil exploration and production, face challenges when crude prices fall. As the market price of refined products does not always decline at the same rate or to the same extent as crude oil, refineries may suffer inventory losses. The value of their stock decreases if they hold inventories purchased at higher prices, squeezing profit margins further.

On September 4, the impact was evident as shares of Oil India and ONGC both traded in the red, with cuts of over 1% and 2.5%, respectively. The falling crude prices have put downward pressure on these stocks, reflecting the market's cautious stance on the profitability of upstream companies in the current environment.

Factors Behind the Drop in Brent Crude Prices

Brent crude prices have plunged to their lowest levels in nearly nine months, reaching close to $73 per barrel from a high of over $81 per barrel just last week. Several factors are contributing to this decline. A significant factor is the growing concern over a potential slowdown in demand from China, the world's largest importer of crude oil. The increasing adoption of electric vehicles in China is also reducing the country’s reliance on traditional fuel sources, adding further pressure to oil prices.

Additionally, there are signs that the dispute that has disrupted Libyan crude production and exports may soon be resolved, which could lead to an excess supply in the market. The Organization of the Petroleum Exporting Countries and its allies (OPEC+) are expected to increase oil output starting in October, with plans to gradually reverse recent production cuts. This move, involving a production increase of 180,000 barrels per day by eight member countries, is seen as an effort to stabilize the market but could also contribute to downward pressure on prices.

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In summary, the decline in crude prices is creating a divergent impact across the stock market. While OMCs and paint companies are positioned to benefit from lower input costs and improved margins, upstream companies like ONGC and Oil India are grappling with reduced profitability due to falling crude prices. As global market dynamics, such as demand fluctuations in China and potential increases in supply from OPEC+ and Libya, continue to play out, investors and market participants are closely watching the developments to gauge their next moves.

Reference: MoneyControl