Oil India, ONGC shares fall up to 23% in September; here’s why

Shares of state-owned oil and gas heavyweights Oil India and ONGC have witnessed sustained selling in the recent past, in sync with BSE Oil & Gas Index, amid sharp decline in crude oil prices. Though reduction in crude oil prices is beneficial for oil market companies (OMCs) as it will boost their profit margins, but sharp drop in Brent crude may lead to inventory losses for refineries that have held inventories purchased at higher prices.

The Brent crude prices have fallen over 29% from their 52-week highs of $98 per barrel to below $70 a barrel today amid global economic concerns and subdued demand from the U.S. and China, the world’s largest crude importers. The worries about softening demand in China amid surge in electric vehicle sales have raised concerns about future demand outlook.  

The BSE Oil & Gas Index has seen a correction of 7% in September, led by 23% decline in share price of Oil India. The index heavyweight ONGC, the country’s largest crude oil and natural gas producer, has tumbled over 13% so far this month, while GAIL India lost over 8% during the same period. Among other, shares of Indian Oil, BPCL and HPCL have declined 3%, 5%, and 1%, respectively, in September.

Continuing its downward trend, all PSU oil stocks were reeling under selling pressure today, with Oil India and ONGC shares falling up to 5% as sell-off gained momentum after OPEC (Organisation of the Petroleum Exporting Countries) cut its demand forecast for global oil demand for the second time in two months.

In a latest report released on Tuesday, the OPEC said that world oil demand would rise by 2.03 million barrels per day (bpd) in 2024, down from 2.11 million bpd expected last month. Going ahead, the organisation of oil producers projects demand growth of 1.7 million bpd next year, about 40,000 bpd lower than originally estimated.

Domestic brokerage Prabhudas Lilladher in a latest report said that recent global developments leading to ample supplies amid weaker demand prospects have pushed Brent oil prices lower. “While upstream earnings are currently impacted, with the OPEC+ delaying its planned rise in production, we expect oil prices to rebound to $75-80/bbl in the near term. Thus, net oil realisation should bounce back to $75/bbl. Additionally, the administered price mechanism (APM) price is set to rise in FY26E and gas produced from new wells would attract premium pricing.”

The brokerage says that these bode well for upstream players. It has upgraded rating on ONGC from ‘Hold’ to ‘Accumulate’ with a target price of ₹329, while maintaining ‘Buy’ on Oil India with a price target of ₹786.

Echoing the same, ICICI Securities in a report says that recent bearishness in global oil & gas prices creates a positive margin scenario for Indian oil & gas companies. “Overall, we would expect crude to average below FY24’s average of $83/bbl for FY25E; on balance, we reduce FY25/26/27E Brent estimates to $80/85/85 per bbl vs. $85/87/87 earlier.”

The brokerage house believes that the dip as of now is negligible for earnings of upstream companies. “If these low oil prices sustain for any length of time, upstream companies clearly seeing a downgrade of 3% in standalone earnings, which may be exacerbated by a decline in their downstream subsidiaries as well (NRL for OIL, MRPL, HPCL for ONGC). We note that the effective reduction in net realisations is only USD 2/bbl, as of now, or less than 3% vs. current estimates.”

The agency says the impact on standalone earnings will not be material, unless crude softens further from here. Gas companies will potentially continue to do well, albeit even for them, reduction in alternate liquid fuels (propane, fuel oil, naphtha) and a reduction of APM as percentage presents pricing challenges.

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