Oil Sector Report for the week (09 - 13.07.2012)

[rupeedesk]

Oil Sector Report for the week (09 - 13.07.2012)

Stocks of the state-owned oil-marketing companies are expected to remain range-bound next week amid uncertainty over crude prices and volatile rupee-dollar movement. Stocks of the three companies Indian Oil Corp Ltd, Bharat Petroleum Corp Ltd and Hindustan Petroleum Corp Ltd will closely track crude prices and rupee-dollar movement. The rupee depreciated sharply against the greenback over the last three days, after having gained on the first two days of the week. Meanwhile, crude prices strengthened again this week after the European sanctions on Iran came into force from Jul 1, affecting crude supplies. We believe that crude prices will remain soft in the near term because of weak global economic conditions. It expects crude prices to remain near $100 a barrel in the current financial year. On Thursday, India's crude basket was $99.40 a barrel.

The rupee, too, is expected to remain weak in the near term because of concerns over the Eurozone. This does not augur well for the oil-marketing companies, which import over 75% of their crude requirements. However, hopes of some hike in prices of regulated fuels like diesel, kerosene and cooking gas after the presidential elections later this month, may support the stocks on the downside. HSBC, however, advises buying Indian Oil stocks as it is undervalued after underperforming the other two government-owned oil marketers during the last six months. IOCL also has the most stable earnings earnings that are the least sensitive to net under-recovery among the three OMCs. Reliance Industries stocks are seen in a narrow band, in line with the broad market, ahead of the company's earnings for the Apr-Jun quarter to be announced in around two weeks. The company has been aggressively buying its stock at levels around 700 under the ongoing buyback at up to 870 rupees per share and that has supported the counter. However, little upside from current levels in the near term. We believe RIL's core business will show earnings growth starting in 3Q FY13 (Oct-Dec), after three quarters of poor to flat results, but any turnaround will likely be modest, predicated on our projection of only moderate improvement in RIL's refining margin and a bottoming out of petrochemical margins.

By RUPEE DESK

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