Oil Stocks Outlook for the week – 13 to 17.06.2016 (Refiners may see correction; upstream companies seen up)

Oil Stocks Outlook for the week – 13 to 17.06.2016
(Refiners may see correction; upstream companies seen up)

The state owned oil marketing companies Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd, and Hindustan Petroleum Corp Ltd is likely to continue next week. Downstream stocks have had a massive rally over the past five months and have been trading at the higher end of the band. We expect the stocks to see further correction of 5-7% over a week or so. In the near-to-medium term, the stocks appear to be strong and this correction should be considered a buying opportunity.

Major sectoral triggers are unlikely and the trend will largely be dictated by global prices of crude oil, which have shown healthy signs of a recovery in recent weeks. News flow and the broad market sentiment are also likely to dictate the trend.

Even as appreciation in oil prices is seen as a negative for downstream companies, it is likely to support them in the current environment due to expectations of inventory gains. The uptick in crude oil prices comes as good news for the stocks of upstream companies Oil and Natural Gas Corp Ltd, Oil India Ltd, and Cairn India Ltd. The stocks performed better than last week, owing to the movement in oil prices, and are likely to trade in a range with a positive bias next week.

Upstream PSU stocks are looking good in the immediate to near term, given the expectations that oil prices will raise further. The stocks are still in a downtrend and are trading below their 200 day moving average. But that may soon change. We expect crude oil prices to continue to head north over the next one week due to reduction in the supply glut following production outages in Nigeria, Venezuela and Libya, and declining inventories in the US.

Investors will eye US oil rig count data for cues. At the end of the week to Jun 3, the oil rig count in the US was at 325, compared with 668 rigs a year ago. Despite the fall in rigs, the oil rig count rose by nine last week, leading to worries that this might mark the return of shale oil producers. It will be interesting to see whether the shale oil producers have been scaling up their drilling activity in response to the recovering oil Prices any continuation of this trend could be interpreted as signs that shale oil production will pick up in the medium term.