Shares of local oil explorers surge on supply disruption fears

Mumbai: Shares of oil exploration companies rallied in a weak market on Thursday as renewed geopolitical tensions between the US and Iran raised concerns of supply disruptions, pushing crude prices higher. Oil India surged 5.2%, while ONGC gained 3.6%, tracking the uptick in Brent crude prices. Among oil marketing companies, HPCL dropped nearly 5%, and Bharat Petroleum Corporation Ltd (BPCL) fell 3.4%.

Brent crude futures rose over 1% to $71.11 per barrel.

“Elevated brent crude prices are supportive for upstream players such as ONGC and Oil India, as higher realisations strengthen margins and cash flows,” said Ankit Garg, head of Equity Investments, Wealthy Nivesh PMS.

For oil marketing companies, an increase in crude prices leads to margin pressure because input costs move up immediately. And if these companies are unable to pass on the costs entirely, it impacts their profitability. The pressure on oil prices stemmed from developments involving Iran, where joint naval drills with Russia in the Sea of Oman and the northern Indian Ocean heightened supply concerns.

Iran temporarily shut parts of the Strait of Hormuz as a security precaution during military exercises. Given that the route is one of the world’s most critical oil shipping routes, any disruption tends to amplify volatility in crude markets. Impact on operating performance will be a function of the duration for which crude oil prices stay elevated, said Sunny Agrawal, head of Fundamental Research at SBI Securities. “We believe, in the longer run, crude oil prices may remain subdued, as demand is muted and, hence, any spike in stock prices of oil exploration companies should be seen as an opportunity to trim the weights in the portfolio,” he said. Analysts said charts are pointing to a 5% upmove in Oil India and a near 10% gain in ONGC from Thursday’s closing.

“Oil India has managed to hold its 50 DEMA (Double Exponential Moving Average) with a surge in trading volumes, which suggests more upside from the current level towards the ₹500 zones with immediate support at ₹460 levels,” said Chandan Taparia, head of derivatives and technical research at Motilal Oswal Financial Services

In the case of ONGC, the stock could move to ₹290-300. “The stock has been finding sustained buying interest near ₹262-265 zones in the last 10 sessions and a small follow-up could lead to the next leg of rally,” said Taparia.