JM Financial expects oil prices to stabilise around $70; favours ONGC, Oil India over OMCs

Following the recent decline in crude oil prices to below USD 70 per barrel, JM Financial Institutional Securities expects Brent to stabilise around these levels. Amid this backdrop, the brokerage firm prefers upstream oil companies like ONGC and Oil India over oil marketing companies (OMCs), maintaining a cautious stance on the latter despite improved valuations.

Crude Oil Price Trends

Brent crude fell below USD 70 per barrel after declining over 6 percent in the last four trading sessions. This pressure on oil prices comes after OPEC+ announced plans to gradually increase oil production by 138,000 barrels per day starting in April. JM Financial highlighted that a crucial determinant of oil prices remains the policy stance of the US government, particularly under President Trump.

As of March 7, oil prices remained largely unchanged but were set for their biggest weekly decline since October, driven by uncertainty over US tariff policies and concerns regarding demand growth. Brent futures rose by 0.24 percent to USD 69.63 per barrel, while US West Texas Intermediate (WTI) futures inched up 0.18 percent to USD 66.48 per barrel. However, for the week, Brent was down 4.9 percent, and WTI declined 4.8 percent, marking their most significant weekly losses since mid-October.

Key Factors Influencing Oil Prices

JM Financial noted that oil prices are being supported by the US administration’s dual objective—keeping energy costs affordable for American consumers while ensuring the financial viability of US oil and gas companies. US shale producers typically require oil prices in the USD 65-70 range to sustain capital expenditures. Any sharp drop below this level could disrupt investments, a scenario the US government is likely to avoid, the brokerage observed.

Another significant factor influencing oil prices is the U.S.-Saudi relationship. Saudi Arabia, with a fiscal breakeven oil price of around USD 85 per barrel, has aligned with US requests to moderate prices by increasing production. However, a steep decline in oil prices toward USD 60 per barrel could strain Saudi Arabia’s fiscal position. The brokerage suggested that if oil prices fall too much, Saudi Arabia may reverse its decision to increase output, potentially pausing or even cutting production.

Investment Outlook: Upstream vs. OMCs

JM Financial maintains a preference for upstream oil companies over OMCs. The brokerage has been cautious on OMCs over the past two years despite acknowledging their improved valuations. OMC stocks are currently trading at approximately 1-1.1 times their price-to-book value, aligning with historical averages, which makes them relatively attractive, said the brokerage. However, the firm believes the risk-reward balance remains uncertain.

The brokerage firm has revised its Brent crude price assumption downward to USD 70 per barrel for FY26 and FY27 from the earlier estimate of USD 75 per barrel. This revision led to a cut in FY26 and FY27 profit estimates by around 7 percent for ONGC and 8-9 percent for Oil India. Consequently, the target price for ONGC was reduced from INR 315 to INR 290 and for Oil India from INR 545 to INR 500. 

However, JM Financial maintains a BUY rating on both ONGC and Oil India due to their robust production growth outlook over the next 1-3 years (~12 percent for ONGC and ~25 percent for Oil India). 

Additionally, Oil India’s earnings growth is expected to benefit from the expansion of the NRL refinery from 3 million metric tons per annum (mmtpa) to 9 mmtpa by December 2025, as per management guidance. The brokerage warned that a significant decline in Brent crude prices below USD 70 per barrel could negatively impact ONGC and Oil India’s earnings, with every USD 5 per barrel decline in net crude realization reducing FY26 earnings per share (EPS) and valuation by 8-12 percent.

Cautious Stance on OMCs

Despite the recent share price correction and decline in oil prices, JM Financial continues to maintain a cautious stance on OMCs. The brokerage highlighted two primary concerns:

Integrated Refining and Marketing Margins: The brokerage expects these margins to normalize around historical levels, as the government may retain the benefits of sustained crude price declines through excise duty hikes or fuel price cuts.

Aggressive Capex Plans: OMCs’ extensive capital expenditure programs remain a structural concern, as many projects fail to create long-term shareholder value.

At current market prices, HPCL is trading at 1.1 times its FY27 price-to-book (P/B) ratio, compared to its historical average of 1.0x. BPCL is at 1.1x FY27 P/B, below its historical average of 1.4x, while IOCL trades at 0.8x FY27 P/B, slightly lower than its average of 0.9x. Given these valuations, JM Financial has maintained a SELL rating on HPCL and IOCL, while assigning a HOLD rating on BPCL.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.