The sharp swings witnessed in global oil prices over recent weeks may begin to ease as geopolitical tensions show signs of cooling, according to Probal Sen, Vice President of Equity Research at ICICI Securities.
Speaking to ET Now, Sen said crude oil prices are likely to remain volatile in the near term but could gradually settle into a more stable range as negotiations surrounding the ongoing conflict progress.
“Our sense really is that once stability is reached and negotiations continue to progress, crude can start to show moderation in terms of volatility,” Sen said.
Crude unlikely to return sustainably below USD70
While easing tensions have sparked optimism in commodity markets, Sen cautioned against expecting a rapid return to pre-conflict oil prices.
According to him, the normalisation of global shipping flows and the removal of risk premiums embedded in insurance and freight costs will take time.
“We do not expect a return to pre-conflict levels of below $70, or even if it does, we do not expect it to stay there,” he said.
Sen expects crude oil to trade in a band of USD75-USD 80 per barrel until greater clarity emerges on a final peace agreement and shipping routes fully normalise.
“Our sense is that while crude will moderate, you would probably see a band of USD75 to USD80 as a reasonable level till the time a final deal is signed,” he added.
Oil marketing companies may see further re-rating
The easing crude outlook could prove beneficial for oil marketing companies (OMCs), with Sen suggesting that the market may not have fully priced in the improvement in their earnings outlook.
Retail fuel margins, which came under pressure during the spike in oil prices, have now moved back toward break-even levels and could even turn positive.
“I think the rerating in OMCs will continue to build. Retail margins have swung back into break-even territory and that is not something that’s fully baked into stock prices at this point,” Sen said.
Although first-quarter earnings may still remain under pressure, he expects a significant turnaround in profitability over the remainder of FY27 if current trends persist.
“You can probably see a significant turnaround in the earnings performance of the OMCs over the rest of the year, and that upgrade will bring its own momentum to the stocks,” he noted.
Upstream oil companies face mixed outlook
Unlike OMCs, upstream oil producers have not fully benefited from recent developments.
Sen pointed out that expectations of softer crude prices have weighed on some upstream stocks, particularly Oil India, reversing part of the gains seen earlier.
However, lower crude prices could reduce the likelihood of government intervention through windfall taxes or measures aimed at capping upstream realisations.
“The chances of any sort of windfall taxes or measures to curtail upstream realisations will recede, and that means FY27 earnings can actually still see upgrades,” he said.
Gas price decline could boost city gas distributors
Sen said that every USD 1 decline in weighted average gas costs can have a meaningful impact on profitability.
According to Sen, the base profitability assumptions for these companies currently range between Rs 5.5 and Rs 6.3 per SCM, making gas cost reductions highly beneficial.
“Any moderation in LNG prices that lowers the weighted average cost of gas will be extremely positive from a margin perspective,” he said.
Gujarat gas faces different dynamics
While lower gas costs are broadly positive, Gujarat Gas faces a more nuanced situation.
The company has benefited from reduced availability and elevated pricing of competing LPG supplies. However, if LPG availability improves and prices fall, some of that advantage could diminish.
“If LPG prices settle closer to USD 650 per tonne, the equation between volumes and margins will have to be reassessed,” Sen said.
Regulatory reforms could drive long-term growth for CGDs
Sen also highlighted recent government measures aimed at accelerating customer connections and expanding natural gas infrastructure.
“These regulations are bound to provide momentum in terms of higher penetration,” Sen said.
“The more we improve penetration of natural gas, the more we reduce dependence on LPG as well as petrol and diesel. That should continue to build momentum for all city gas distribution companies in the country,” he said.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
