Crude oil prices rose for the second consecutive day, with Brent nearing $75 and WTI over $74 amid Middle East tensions. This surge may negatively impact Indian stocks, but benefit upstream firms like ONGC and Oil India, which could see EPS boosts from rising prices.

Crude oil prices in focus today: Crude oil prices remained elevated for the second straight day on Monday, with Brent crude futures climbing toward $75 per barrel and WTI crude futures crossing the $74 mark, as tensions in the Middle East showed no signs of cooling off. 

Over the weekend, Iran and Israel continued to exchange attacks, raising fears that the conflict could impact crude oil supplies from the region. Iran, which holds about 9% of the world’s oil reserves, signaled that it may shut down the Strait of Hormuz—a key global oil transit route.

The rise in crude oil prices has brought negative sentiment to the Indian stock market, as the commodity is a crucial raw material for many sectors. If prices remain elevated, it could lead to higher input costs and potentially hurt corporate earnings.

However, rising oil prices may benefit upstream oil companies like ONGC and Oil India. According to domestic brokerage firm JM Financial’s latest report, ONGC and Oil India are key beneficiaries of higher crude prices, with every USD 1/bbl increase in oil price boosting their EPS by 1.5–2%.

Furthermore, it pointed out that there is currently no cap on ONGC and Oil India’s net crude realisation (unlike the previous cap of USD 75/bbl in place from July 2022 to November 2024), as the government removed the windfall tax on crude petroleum effective December 2, 2024.

The brokerage also sees a low probability of a windfall tax being reimposed in the future, especially after the government recently enacted the Oilfields (Regulation and Development) Amendment Bill, 2024, which provides fiscal stability to encourage private and foreign investments in the exploration and production (E&P) segment—aimed at reducing India’s dependence on oil imports.

Further, Oil India’s earnings growth is expected to be supported by the planned expansion of the Numaligarh Refinery (NRL) from 3 MMTPA to 9 MMTPA by December 2025, in line with management guidance. This expansion is also likely to benefit from the continuation of excise duty incentives for the increased capacity, further enhancing earnings potential.

As a result, the brokerage has retained its 'buy' rating on Oil India, with a target price of ₹500, and on ONGC, with a price target of ₹290.

Cautious on OMCs amid rich valuations 

JM Financial maintains its 'Sell' rating on HPCL, IOCL and a 'Hold' rating on BPCL as it expects the integrated refining and marketing margins of oil marketing companies (OMCs) to revert to historical levels.

This could happen due to either a sustained rise in crude oil prices or the government retaining the benefit of any sustained decline in crude prices through excise duty hikes and/or fuel price cuts to consumers.

The brokerage also flagged concerns over the OMCs’ aggressive capex plans, noting that many of these projects may fail to generate long-term value for shareholders, thereby accentuating key structural risks.

At current market prices, HPCL is trading at 1.3 times its estimated FY27 price-to-book value (P/B), compared to its historical average of 1.0x. BPCL is also trading at 1.3x FY27 P/B versus a historical average of 1.2x, while IOCL is trading at 0.9x FY27 P/B, in line with its long-term average.

Oil on a boil! How will rising crude prices impact ONGC, Oil India earnings? JM Financial explains

Rising crude oil prices, driven by Middle East tensions, may negatively impact Indian stocks but benefit upstream oil companies like ONGC and Oil India. The removal of a windfall tax on ONGC and Oil India, along with the expansion of Oil India's Numaligarh Refinery, could boost their earnings. JM Financial maintains 'buy' ratings on ONGC and Oil India but 'sell'/'hold' ratings on integrated oil marketing companies (OMCs) due to structural risks.