What is Driving the Rally in Oil Stocks in India?

The market cap of ONGC crossed Rs.2 trillion mark after a very long time. The stock has rallied by over 35% in the last two months and this trend is visible across other upstream and downstream oil companies. What exactly is driving this enthusiastic response to the oil and gas stocks?

It is hard to imagine when was the last time we saw such a sharp rally in oil stocks. Clearly, the impact has been the most visible in the upstream oil extractors like ONGC and Oil India and the dedicated gas players like GAIL. For the upstream oil companies, the spike was a mix of positive tidings on oil price and also on gas prices.

The first reason is the sharp spike in crude oil prices. In the last one year crude prices have climbed from $30/bbl to $82/bbl. Currently, Brent Crude quotes at $82/bbl while WTI crude quotes at $79/bbl. For both the baskets of crude oil, this is the highest price level since the oil prices started falling in the last quarter of 2014. That has meant better realizations.

A spike in Brent Crude prices improves the landed price of crude and thus improves the realization per barrel. This has been a big positive for ONGC and Oil India, although Oil India has also gained from the stake sale in Numaligarh Refinery. Refiners gain as higher prices lead to better gross refining margins and also better translation value for inventories.

The other reason for the enthusiasm is the higher gas prices fixed by the government for the second quarter. For the regular gas finds, the government has hiked prices by 62% from $1.79 per BBMtu to $2.90 per BBMtu. In addition, the deep-water gas prices were raised to $6.13 per MMBtu. This is likely to be a big positive for the gas extractors like RIL and ONGC and also for transporters like GAIL.

Of course, some of downstream players like CGDs stand to lose, but the overall impact is likely to be positive for oil.

Read: Sectors dependent on crude Oil