The price of Brent crude oil has fallen to $61 per barrel from an average of $79 per barrel in January, when the Trump administration took charge. There are several reasons for the sharp fall.
One, the ongoing tariff war threatens to slow down global economic activity, which could hurt demand for crude. Two, US president Donald Trump is pushing for more oil drilling to increase output, against the wishes of environmentalists. Three, a group of OPEC+ countries are strategically raising their oil production quota from April, thus creating downward pressure on crude prices. This in turn could discourage investments in oil production in the US, where costs are relatively higher.
All things considered, the outlook for crude prices is benign in the foreseeable future. So, how can investors play the crude theme?
Excise duty hiked
It’s no secret that some individual investors and fund managers avoid the Indian oil & gas sector owing to the risk of government interference. That risk played out when the government raised the excise duty on petrol and diesel by ₹2 per litre earlier this week.
This effectively squeezed the marketing margins of oil marketing companies (OMCs) as the retail prices of the two fuels were not changed. There is also a possibility that the excise duty will be increased further or retail prices will be cut.
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While government intervention makes it hard to predict marketing margins, it is relatively easier to estimate the impact of liquefied petroleum gas (LPG) losses. The government recently raised the price of a 14.2-kg domestic LPG cylinder by ₹50 from 8 April. Before this, the loss on the sale of a single LPG cylinder was ₹200, so the price hike reduces the loss by 25%.
Loss leader
Lower LPG losses will help OMCs offset potential hits if the government reduces petrol and diesel margins further. So which one is best-placed to benefit?
Enter Indian Oil Corp Ltd (IOC). It has the highest losses on LPG sales, at ₹14,330 crore for the nine months to December (9MFY25). For perspective, IOC reported a net profit of ₹3,850 crore for 9MFY25, adjusted for extraordinary gain.
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For Hindustan Petroleum Corp Ltd (HPCL) and Bharat Petroleum Corp Ltd (BPCL), losses from LPG sales in 9MFY25 were ₹7,600 crore and ₹7,230 crore, respectively. Their net profit figures were ₹4,010 crore and ₹10,060 crore.
So it’s clear the biggest beneficiary of a reduction in LPG losses is IOC, followed by HPCL. BPCL will see the smallest impact. This also means IOC is best placed to benefit from lower crude prices, which would lead to lower LPG prices. Note that the LPG losses in 9MFY25 correspond to the average Brent crude oil price of $79 per barrel during the period, according to Bloomberg data. LPG prices typically fall in tandem with crude prices. The current Brent crude price of $61 should mean another 25% or so reduction in LPG losses for OMCs.
Kotak Institutional Equities values IOC, HPCL and BPCL at an equal valuation multiple of 5x based on EV/Ebitda estimates for March 2027. However, it won’t be a surprise if investors tilt towards IOC for the reasons explained above, especially if crude prices continue to fall.
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