In last few days, many new events have took place causing volatility in international markets. Air strikes on Syria is one of the most important event that can affect the crude oil prices soon. Any cut in production of crude oil internationally will also lead to further rise in prices of oil which will have a negative impact on our Indian Economy because we import a major part of demanded quantity
However, one another issue or concern simultaneously going higher with the crude oil prices rise is the availability of possible margins in current financial year for the OMCs. In last few weeks, crude oil prices have gone up as much as $ 7/barrel which translates into a Rs 3/litre rise for Domestic importers like OMCs. As we have already seen some rise in prices of petrol and diesel in last few weeks in domestic market, rise in international market would not look as a bad one.
But, now the concern over OMCs is that whether they would be able to pass on the rising cost to its customers this year also? Biggest election of India is on the way and current central government will definetly try not to touch sensitive demand pockets of public i.e is Petrol.
However, when there are clear chances of being having further increased prices of crude oil in international market soon. Chances of being a consolidation in prices of crude oil for next few months are also higher.
Many experts believe that $75/barrel for crude oil is a peak price at least for the next few months. Oil producing countries are continuously trying to cut the supply as much as possible so that crude oil prices could see a constant rise. However, how much would they get success in their objective is unknown.
Particularly talking for the next few weeks or say 1-2 months, I think OMCs may soon see a recovery in their stock prices. In previous quarter, there was a big jump in the profit number of OMCs only due to large inventory gains. So, it is possible to see a weak financial numbers of OMCs on profit front in this quarter as compare to previous financials. But I think this has been already discounted by oil marketing stocks like IOC, HPCL etc because they are now trading at the Price to earning ratio of below 10 which is lower than before records. Also I think investors are now somewhere ready to face any outcome from central government soon which would force OMCs to aborb Rs 1 cost as a burden in their accounts.
However, OMCs have not mentioned any special order from government as of now which relates to absorption of Cost burden of Crude oil import. So, I think if something like this not come in next few days from the side of government, stocks prices of OMCs would able to start recover.
So, overall I think if the government really forces OMCs to absorb the cost burden of importing crude oil soon, then it is possible to see a pressure on stock prices of them for more months. But if nothing happens like this, oil marketing stocks may start recovering. And therefore I believe that chances of having a recovery in the OMCs share are higher for the short-term. Stocks have potential to climb as much as 15-20 percent in a single week. So, buying Stocks like IOC at current levels in a relatively fair amount and then taking a exit at a premium of 10-15 percent could be a great opportunity if you have a very short-term view. In lower side, I don’t think risk is higher because OMCs stocks are already trading at a very attractive price for long-term investors.
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