Oil Marketing Company (OMC) shares have been falling as crude oil prices edge higher. However, at these levels it may not be a bad idea to take a contrarian call on oil marketing companies.
How oil marketing companies are impacted by crude prices?
When crude prices rise, margins of oil marketing companies (HPCL, BPCL, IOC) tend to get impacted as they import crude and refine the same into petrol, diesel etc. However, since petrol and diesel prices are linked to market rates, there is no such major worry and they can pass on the hike to consumers.
However, we have to bet on the fact that crude prices would fall, if you are betting on the stocks of oil marketing companies. There are several reasons to believe so. Firstly, there is enough and plenty of crude supply, especially from places like Iraq, which will have fresh supply coming in.
At $75 per barrel, we could see shale oil production resuming and adding to fresh supply. Hence, we see crude prices dropping at some stage, which should augur well for the oil marketing companies.
Some of these companies like HPCL, BPCL and IOC have been paying a hefty dividend in the last few days. If they maintain the same dividend, you are in for yields of as much as 6-7 per cent. However, one would have to wait and watch to see if the dividends are maintained.
Sharp fall in stock prices
The one reason to be betting on these stocks is that the downside risk now, in these shares seem very limited. HPCL has seen its shares fall from levels of Rs 490 to Rs 307, while BPCL has dropped from levels of Rs 551 to Rs 382. Similarly, IOC has also seen a huge slump of almost 40 per cent in its stock price.