Oil Stocks Outlook for the week – 01 to 05.08.2016 (PSU refiners seen positive, oil prices eyed)

Oil Stocks Outlook for the week – 01 to 05.08.2016
(PSU refiners seen positive, oil prices eyed)

The shares of state-owned oil refining companies Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd,
and Hindustan Petroleum Corp Ltd are likely to trade with a positive bias next week, given the fresh
weakness in crude oil prices and likelihood of strong Apr-Jun earnings for these companies. Earnings
are expected to be better on hopes of high inventory gains. The positive mood is attributable to a muted outlook for crude prices. This implies healthy B/S (balance sheet), and product demand at lower end-prices, resulting in sustained and higher marketing segment profits.

We expect stock prices to peak with 1Q results; a correction will follow on weak GRM (gross refining margins), allowing a fresh entry point. In the absence of any major sectoral trigger, the trend for downstream as well as upstream oil companies over the next few sessions will be determined by the movement in crude oil prices as well as sentiment in the broad market.

Crude oil futures on domestic as well as global exchanges are likely to extend losses into the third
straight week with increasing worries over excess supply of crude oil and refined products. Crude oil
prices fell to an over 14-week low today, to 2,737 rupees per barrel on the Multi Commodity
Exchange of India, and were at $40.69 a bbl on the New York Mercantile Exchange.

The US Energy Information Administration reported that US crude oil inventories rose by an
unexpected 1.7 mln bbl in the week ended Friday. The market had projected a 1.6-mln-bbl decline.
Petrol stocks rose by 500,000 bbl despite this being the key summer driving season in the US. For upstream players such as Oil and Natural Gas Corp Ltd, Oil India Ltd, and Cairn India Ltd, a rise
in crude oil prices will have a negative impact as these entities produce and sell the commodity. On the other hand, a gradual decline in crude prices is a positive for refiners, as it is the primary input for
them, but downstream companies take a hit if the decline in oil prices is sharp, as it leads to inventory
losses for them.

The oil marketing companies are scheduled to revise fuel prices on Sunday. Although it is a routine
exercise, the price revision may have some sentimental impact on Monday. The shares of the three oil
marketing companies are already in the overbought zone but there are no signs of weakness yet and
the rally might continue in the immediate-to-near term.

Among the three stocks, Indian Oil is the top pick and could appreciate by another 10% over the next
7-10 sessions, and may also see a breakout early next week at around 500-rupee levels. Fluctuation in
the dollar-rupee exchange rates is also likely to affect shares of downstream and upstream oil
companies. If the dollar strengthens against the rupee, it will hit refining companies and benefit
upstream players. A weak dollar, on other hand, will help downstream companies, as India primarily
relies on imported crude oil to meet its requirements.