Why Crude Oil May Stay Above Pre-Conflict Levels and Boost OMCs

While geopolitical tensions show signs of easing, the global crude oil market is unlikely to return to its pre-conflict lows in the immediate future. For Indian investors, this price stability could trigger a significant re-rating in Oil Marketing Companies (OMCs) and City Gas Distribution (CGD) players.

Crude Oil: The $75–$80 Trading Band

According to Probal Sen from ICICI Securities, the recent cooling of crude prices does not signal a return to the sub-$70 levels seen before the current conflicts. While peace negotiations have introduced optimism, several structural factors continue to support a "risk premium" in the market.

Sen highlights that the full normalization of shipping flows will take time. Even as negotiations progress, elevated insurance costs and higher freight charges are expected to keep crude prices in a higher trading band. He suggests that a range of $75 to $80 is a reasonable expectation for crude until a final deal is signed and the current 60-day uncertainty period concludes. Furthermore, the exclusion of certain players from current Memorandum of Understanding (MoU) negotiations suggests that fresh volatility remains a possibility.

Upside Potential for Oil Marketing Companies (OMCs)

Despite the potential for volatility in crude, the outlook for Indian OMCs appears promising due to recovering retail fuel margins. Sen notes that while the June quarter (Q1) numbers might disappoint and lead to some temporary stock price pushback, a broader turnaround is expected.

Retail margins have recently swung back into break-even territory and are even showing signs of entering positive margin zones. As these improved margins are not yet fully reflected in stock prices, a re-rating process is likely to build momentum throughout the remainder of the financial year. Investors should look past the immediate quarterly results to the potential earnings turnaround driven by stabilized fuel margins.

Lower Costs to Benefit City Gas Distribution (CGD)

The City Gas Distribution sector stands to benefit significantly from any moderation in global energy prices. The primary driver here is the reduction in LNG procurement costs, which directly impacts the bottom line of gas distribution companies.

Sen provides a clear sensitivity analysis for these companies: every $1 change in the weighted average gas cost impacts the per-unit EBITDA by approximately Rs 2 to Rs 3.5 per SCM (Standard Cubic Meter). Given the current base case for gas costs being between Rs 5.5 and Rs 6.3 per SCM, any reduction in LNG prices will act as a major catalyst for margin expansion across the sector.

Impact on Upstream Companies and Windfall Taxes

While softer crude prices have recently weighed on upstream companies like Oil India, there is a silver lining for long-term earnings. Lower crude prices reduce the likelihood of the government imposing windfall taxes or measures to curtail upstream realizations. This reduction in fiscal pressure could lead to earnings upgrades for upstream players as they look toward FY27.

Key Takeaways

  • Crude Price Floor: Crude is expected to trade in a higher band of $75–$80 due to lingering shipping disruptions and insurance risk premiums.
  • OMC Re-rating: Although Q1 earnings may be weak, improving retail fuel margins suggest a significant earnings turnaround for OMCs later in the year.
  • Gas Sector Sensitivity: CGD companies are highly sensitive to LNG prices, where a $1 drop in gas costs can boost EBITDA by Rs 2–3.5 per SCM.