Crude Oil Outlook: Why Prices May Stay High and OMCs Could Rally

Geopolitical tensions are showing signs of easing, but market experts warn that crude oil is unlikely to return to its pre-conflict lows in the immediate future. While peace negotiations offer hope, persistent structural risks in shipping and insurance could keep energy markets in a volatile, higher-priced trading band.

The $75–$80 Crude Oil Trading Band

According to Probal Sen from ICICI Securities, while the recent frenzy in crude prices has moderated, a return to levels below $70 is unlikely for the time being. Even if prices do dip toward that mark, they are not expected to sustain there.

The primary reason for this sustained "risk premium" is the slow normalization of global shipping flows. Sen highlights that elevated insurance costs and higher freight charges are acting as price floors. Until a final peace deal is signed and the current 60-day observation period concludes, crude is expected to trade within a stable band of $75 to $80. Investors should also remain cautious of fresh volatility, as certain stakeholders excluded from current Memorandum of Understanding (MoU) negotiations may not honor existing ceasefires.

Bullish Outlook for Oil Marketing Companies (OMCs)

While the crude oil supply side faces volatility, Indian Oil Marketing Companies (OMCs) are positioned for a potential re-rating. Recent data suggests that retail fuel margins have swung back into break-even territory and, in some instances, are generating positive margins.

Sen suggests that the market has not yet fully priced in this margin recovery. While the June quarter (Q1) earnings might appear disappointing—potentially leading to short-term price corrections—the outlook for the remainder of the financial year remains bright. If the geopolitical deal progresses, a significant turnaround in earnings performance is expected, providing upward momentum for OMC stocks.

Upside Potential in City Gas Distribution (CGD)

The City Gas Distribution sector stands to benefit significantly from any moderation in global energy prices, specifically through lower LNG procurement costs. The margin sensitivity in this sector is high; a $1 change in the weighted average gas cost can impact per-unit EBITDA by approximately ₹2 to ₹3.5 per SCM.

With a base case gas cost estimated between ₹5.5 and ₹6.3 per SCM, any reduction in LNG prices will act as a major tailwind for these companies' profitability.

Upstream Sector and Windfall Tax Risks

In contrast to OMCs, upstream companies like Oil India have seen their recent gains reversed due to softer crude prices. However, there is a silver lining for long-term earnings. Lower crude prices reduce the likelihood of the government imposing windfall taxes or implementing measures to curtail upstream realizations. As clarity emerges on baseline crude prices, the possibility of earnings upgrades for FY27 becomes increasingly viable.

Key Takeaways

  • Crude Price Floor: Due to shipping and insurance risk premiums, crude oil is expected to trade in a higher range of $75–$80 rather than returning to pre-conflict levels below $70.
  • OMC Recovery: Despite potentially weak Q1 numbers, OMCs are expected to see an earnings turnaround and stock re-rating as retail fuel margins stabilize.
  • Gas Margin Sensitivity: City Gas Distribution companies are highly sensitive to LNG prices, where a $1 drop in gas costs can significantly boost per-unit EBITDA.