Oil Marketing Companies Set To Rally With Downstream Firms In Favour, Says Citi

Shares of oil marketing companies may rally given the strong fundamentals, with the downstream firms set to gain over their upstream peers, according to Citi.

The last quarter was subdued because of higher oil prices, weak refining margins, and fuel price cuts, according to Saurabh Handa, director of India Oil and Gas and Telecom at Citi. "All these factors seem to be reversing. If the current situation sustains, we could see a situation where the second quarter is better than the first, and the third quarter will be even better than the second," he said.

The other positive catalyst can be from the LPG side, Handa said. Citi expects the government to provide grants to OMCs for LNG losses by the third quarter of the financial year. "So, things seem to be sort of falling into place for the OMC for a bit of a rally from here." This is what is driving Citi's positive catalyst watch, he said.

On crude prices, Citi has been neutral to bearish because there are geopolitical risks, but the fundamentals are not very supportive, Handa said. "After the ongoing summer period, (oil price) might see potential struggling at $80 a barrel."

As long as crude is around $75, the earnings for these companies are fairly okay, but the risk would escalate if the price of crude were to exceed that threshold, he said. "That is when you might relook at earnings at upstream companies, but we are not there yet."

As things stand downstream, there is a better chance versus upstream in terms of prospective gains, Handa said.