JM Financial Predicts Oil Prices to Stabilize at $70, Favors ONGC and Oil India Over OMCs
Oil Prices Set to Stabilize, Upstream Companies Favored
JM Financial Predicts: Amid the recent decline in crude oil prices below $70 per barrel, JM Financial Institutional Securities expects Brent crude to stabilize around this level. With this outlook, the brokerage firm has expressed a preference for upstream oil companies like ONGC and Oil India over Oil Marketing Companies (OMCs), maintaining a cautious stance on OMCs despite improved valuations.
Crude Oil Price Trends and Market Impact
Brent crude prices dipped below $70 per barrel following a sharp decline of over 6% in the past four trading sessions. This downward pressure was primarily driven by OPEC+ announcing a production increase of 138,000 barrels per day starting in April. Another crucial factor affecting oil prices is the stance of the US government, which continues to balance between keeping energy costs low and ensuring the profitability of domestic oil producers.
As of March 7, oil prices showed slight recovery but remained on track for their biggest weekly decline since October. Brent futures rose 0.24% to $69.63 per barrel, while WTI futures gained 0.18% to $66.48 per barrel. However, for the week, Brent crude recorded a 4.9% decline, and WTI dropped by 4.8%, marking their worst performance since mid-October.
Key Factors Influencing Oil Prices
1. US Government’s Dual Objective
The US administration aims to keep fuel affordable for consumers while ensuring that domestic oil producers remain financially viable. Most US shale producers require crude oil prices between $65 and $70 per barrel to sustain operations. A sharp drop below this level could impact capital investments, which the US government is likely to avoid.
2. Saudi Arabia’s Fiscal Constraints
Saudi Arabia, which has a fiscal breakeven oil price of around $85 per barrel, has been moderating oil prices by increasing production in response to US requests. However, if oil prices decline further to around $60 per barrel, it could put Saudi Arabia’s financial position under strain. In such a scenario, the kingdom might reconsider its production strategy, potentially pausing or even cutting output.
Investment Outlook: Upstream vs. OMCs
JM Financial has a positive outlook on upstream oil companies like ONGC and Oil India, citing strong production growth potential. Meanwhile, despite attractive valuations, the firm remains cautious about OMCs.
The brokerage firm has revised its Brent crude price assumption downward to $70 per barrel for FY26 and FY27 from the earlier $75 per barrel. As a result, JM Financial cut profit estimates for ONGC and Oil India by 7% and 8-9%, respectively.
This revision led to a target price reduction for:
- ONGC: From ₹315 to ₹290
- Oil India: From ₹545 to ₹500
Despite this, the brokerage maintains a BUY rating on both ONGC and Oil India, given their strong production growth outlook over the next 1-3 years (estimated at ~12% for ONGC and ~25% for Oil India).
Oil India’s Refinery Expansion: A Key Growth Driver
Oil India is set to benefit significantly from the expansion of the NRL refinery from 3 million metric tons per annum (mmtpa) to 9 mmtpa by December 2025. This expansion is expected to drive earnings growth and enhance long-term profitability.
However, a sharp decline in Brent crude prices below $70 per barrel could negatively impact ONGC and Oil India’s earnings. According to JM Financial, every $5 per barrel decline in crude realization could reduce FY26 earnings per share (EPS) and valuations by 8-12%.
Cautious Stance on Oil Marketing Companies (OMCs)
Despite recent share price corrections and declining oil prices, JM Financial remains cautious on OMCs due to the following concerns:
1. Integrated Refining and Marketing Margins
The brokerage anticipates that refining and marketing margins will normalize at historical levels, as the government may choose to increase excise duties or cut fuel prices, thereby limiting the benefits of lower crude prices.
2. Aggressive Capital Expenditure Plans
OMCs continue to invest heavily in infrastructure and expansion projects, many of which fail to create long-term shareholder value.
Valuations and Ratings for OMCs
At current market prices, OMC stocks are trading near historical averages:
| Stock | Price-to-Book (FY27) | Historical Average | Rating |
|---|---|---|---|
| HPCL | 1.1x | 1.0x | SELL |
| BPCL | 1.1x | 1.4x | HOLD |
| IOCL | 0.8x | 0.9x | SELL |
Final Thoughts: A Favorable Outlook for Upstream Players
JM Financial continues to favor ONGC and Oil India due to their strong production outlook and growth potential. However, the firm remains wary of OMCs due to their high capex plans and volatile refining margins.
Investors looking for strong long-term returns may find upstream oil companies a better bet, while OMCs remain a risky proposition despite improved valuations.
Key Takeaways:
✔ Oil prices expected to stabilize around $70 per barrel
✔ ONGC and Oil India preferred over OMCs
✔ Crude price assumption revised to $70 for FY26 and FY27
✔ BUY rating on ONGC and Oil India, SELL on HPCL & IOCL, HOLD on BPCL
✔ Oil India’s refinery expansion to drive earnings growth
✔ OMCs remain a cautious bet due to high capex and margin risks
With crude oil prices likely to stabilize in the coming months, investors should keep a close watch on global production trends, geopolitical shifts, and government policies, which will play a key role in shaping the energy market.
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.