Oil marketing companies (OMCs) such as HPCL and BPCL experienced a significant increase in their stock prices on June 7. The stocks were up by 3 to 5 percent, driven by several factors.

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Morgan Stanley predicts that OMCs will be able to surpass their pre-Ukraine war book values in the next two months, thanks to the crude basket being priced at approximately $110 per barrel. This positive outlook is further supported by the fact that marketing margins for these companies are reaching new highs.

The fourth-quarter earnings of oil marketing companies were robust, particularly in the refining segment. Investors now anticipate that the marketing segment will also perform well.

Despite the recent surge in stock prices, the multiples for these companies remain below mid-cycle returns. This is somewhat surprising considering the earnings tailwinds predicted by Morgan Stanley in the marketing segment. However, the integrated margins in the marketing segment have reached their highest-ever level. This is primarily due to the fact that despite the decline in crude prices, petrol and diesel prices have not been reduced. As a result, OMCs have benefited from higher marketing margins, which should help them recover from the losses incurred in Q3.

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Even if oil prices remain above $80 per barrel, OMCs have sufficient cushioning to generate profits in the marketing segment. This would reduce the need for government support, estimated at around Rs 30,000 crore. Additionally, the current crude prices of approximately $75 per barrel provide room for potential cuts in petrol and diesel prices ranging from 2 to 5 percent. However, if price reductions do not occur, marketing margins will likely remain at elevated levels, which could serve as the next trigger for the oil marketing sector as a whole.