Brent Crude Falls 25% YTD on Weak Demand: Should You Buy OMC Stocks? D-Street Experts Pick ONGC, Oil India

Brent crude futures have fallen nearly 25 percent year-to-date (YTD) on weaker demand and a low risk premium for 2024. At a nine-month low, the oil benchmark fell to a 33-month low below $70 a barrel on continued weakness in Chinese economic growth and uncertainty about U.S. growth. China is the world’s largest consumer/importer of crude oil.

Adding to concerns about the negative impact is a potential oversupply caused by the Organization of the Petroleum Exporting Countries and its allies (OPEC+), which is phasing out 2.2 million barrels per day (mbd) of voluntary production cuts over the course of a year from December 2024 to November 2025. However, D-Street experts believe the drop in oil prices has been exaggerated due to the commodity’s huge leverage.

Read also: Crude View: D-Street Experts Estimate Brent Crude Oil Price at $75-$80 in Short Term, Morgan Stanley Cuts Forecast by $5 on Weak Demand

Historically, lower oil prices have eased inflationary pressures and lowered retail prices for gasoline and diesel. Ahead of a much-anticipated U.S. Federal Reserve decision due on September 18, oil prices are teetering on the edge of potential growth as a widely expected interest rate cut by the central bank could revive demand in the world’s largest oil consumer.

OPEC+ halts planned production increase due to oil price collapse

OPEC+ has put a two-month hold on a planned October oil production increase amid fragile demand and abundant supply, especially after reports of a deal with Libya being terminated. Key OPEC coalition members will not undertake a planned 180,000 barrels per day (bpd) increase in October. OPEC is holding back a fraction of 5.86 million bpd of production, or 5.7% of global demand, to support the market over demand concerns and rising supply outside the group.

According to domestic brokerage firm JM Financials, the pricing power of the OPEC+ group has increased over the past two to three years due to limited growth in US oil production as American shale investors have become disciplined in investing capital.

Read also: OPEC+ to suspend planned 180,000 barrels per day oil production increase in October for two months after Brent crude fell to 14-month low

OPEC+ has shown significant capacity to cut production by ~10 million barrels per day early in calendar year 2020 to offset a ~10% decline in global oil demand following COVID-19. OPEC+ can still cut production by 3-5 million barrels per day to offset any macroeconomic risks to demand.

Brent Down 25% Year-to-Date: Which OMC Stocks Should You Buy?

According to prices on Investing.com, Brent crude futures reached an intraday high of $92.18 per barrel on April 12, 2024, the highest peak reached YTD. The benchmark hit a YTD low of $68.68 per barrel on September 10. The difference between the two numbers represents an average decline of 25 percent YTD.

JM Financial believes that the risk-reward ratio of India’s three state-owned oil marketing companies (OMCs) remains unfavourable. The brokerage believes that the OMCs may remain at risk due to the continued weakness in domestic oil demand in China and higher gross marketing margin than the historical average ₹3.5/litre.

Read also: Oil recovers 3% from 33-month low after Hurricane Francine sparks supply concerns; Brent at $71, WTI gains more than $2

He, however, added that historical precedent suggests that the government will reduce retail prices of petrol/diesel and/or increase excise duty on fuel if crude oil prices remain lower. Hence, the benefits of lower crude oil prices in the OMC marketing segment are likely to be limited to just a few months.

According to the brokerage, OMC stock valuations are also trading at a premium of 20-40 per cent to historical P/B valuations: -Hindustan Petroleum Corp Ltd (HPCL) at 1.5x FY26 P/B (vs. average of 1.0x)– Indian Oil Corp Ltd (IOCL) is trading at 1.2x FY26 P/B (vs. average of 1.0x)

Read also: Oil Tax Reduced to ‘Zero’ from THIS Date; Diesel and ATF Retained at Zero– Bharat Petroleum Corp Ltd (BPCL) is trading at 1.6x FY26 P/B (vs. 1.3x average). Furthermore, their aggressive capex plans underscore a key structural issue as many projects fail to create long-term shareholder value.

The brokerage house left the target prices (TP) unchanged for all three OMCs and assigned a ‘hold’ rating to BPCL. “We reiterate that their risk-reward ratio remains unfavourable and maintain our SELL rating on HPCL (unchanged TP ₹290) and IOCL (unchanged TP ₹150) and our HOLD rating for BPCL (unchanged target price ₹290),” JM Financials said of OMC shares.

Read also: Oil plummets on supply-demand imbalance in 2024, Brent falls 20% in 12 months; OPEC+ in focus

D-Street Experts Choose ONGC, Oil India Due to Low Crude Oil Prices

“We maintain BUY ratings on Oil India (unchanged target price of INR 720) as well as ONGC (unchanged target price of INR 340) given the outlook for solid production growth over the next 1-3 years (20-30% for Oil India and 12-15% for ONGC) and our expectation that OPEC+ will maintain the oil price at ~$75/bbl,” JM Financials said.

Moreover, Oil India’s earnings growth is likely to be supported by the expansion of NRL’s refinery from three million barrels per day to nine million barrels per day by December 2025, given management’s guidance that the expanded capacity will continue to be subject to excise duty benefits.

Read also: Oil rises 2% from three-year low after investors bet on rising demand ahead of US Federal Reserve rate cut; Brent at $73/bbl

“However, ONGC/Oil India earnings will be negatively impacted if Brent crude oil price remains below $75/bbl. Every $5/bbl drop in crude oil net realisation results in a six-eight per cent drop in earnings per share and valuation. On CMP ONGC is trading at 5.6x FY26E EPS and 0.9x FY26E BV, while Oil India is trading at 9.2x FY26E EPS and 1.5x FY26E BV,” the broker added.

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