Oil companies shares fall sharply as Iraq crisis boils over

MUMBAI: Shares of domestic oil marketing companies dipped sharply on Friday in reaction to the surge in crude oil prices, disappointing investors who were expecting the new government’s move towards market-linked diesel prices to fuel a rally. India import’s about 85% of its crude requirement.

On Friday, Brent crude oil hit a nine-month high near $115 a barrel as the US threatened military action to curb escalating violence in Iraq, raising concerns over its oil exports. The spike in oil sent HPCL’s share price down 8.17% to Rs 392.55.

BPCL’s shares declined 5.14% to Rs 568.25 and Indian Oil’s fell 5.07% to Rs 333.20. Investors are worried that the spike in oil will disrupt the government’s plan to de-regulate crude prices, leading to higher inflation and increase the subsidy burden on oil marketing companies.

“If the crises deepen and crude prices goes up, the prospects of deregulating crude prices may diminish, as it will fuel inflation and recovery of economy will take a back seat,” said Pankaj Pandey, head of research, ICICI Securities. “If the government allows market-linked prices for diesel and other petroleum products, oil marketing stocks will have limited impact.”

According to reports, militants have seized control of Mosul in northern Iraq and are seen headed for capital Baghdad. Iraqi oil minister Abdul Kareem Luaiby's assurance that violence is unlikely to reach oil fields in southern Iraq has been of little help. Sunni insurgents gained more ground in Iraq, moving into two towns in the eastern province of Diyala after security forces abandoned their posts. Some analysts, however, attribute Friday’s fall in stock prices of oil market companies to profit-booking.

“If crude prices go up, it is clearly not good for an importing country like India. However, we have seen many such situations in the Middle East over the last few years, but their long-term impact was limited,” said Chokkalingam G, founder & CEO, Equinomics Research & Advisory. “Large investors booked profits on Friday in some of these stocks after their run-up over the last few months,” he said.

Shares of HPCL have surged 65% so far this year, while BPCL and IndiaOil have gained 63% and 56%, respectively, year-to-date. As per Crisil’s estimates, the efforts to move towards market-linked diesel prices and an expected decline in crude oil prices, under-recoveries on petroleum products are expected to drop to half in the current financial year.