BPCL, HPCL, IOCL, Reliance Shares Alert: Why Oil & Gas Stocks Fall After Rs 3/Litre Windfall Tax On Petrol?

Oil and gas stocks tumbled sharply on May 18, after the government imposed Rs 3 per litre windfall tax on petrol but lowered levies on diesel and ATF. Nifty oil and gas index plunged by nearly 1.6% to hit a low of 11,071 in the day. Majority of oil and gas companies are trading in the red. Oil Marketing Companies like Indian Oil, HPCL and BPCL have taken the worst hit, while selling pressure is witnessed in ONGC and Oil India as well. Reliance Industries recovered early losses.

Oil & Gas Stocks Fall Today

At the time of writing, Nifty Oil & Gas index dropped by 0.8% to trade at 11,165.30. However, in the early trade, this index plunged by 1.6% to hit an intraday low of 11,071.45, compared to the previous session's closing price of 11,250.70.

Among worst performers, Chennai Petroleum Corporation took lead with over 2.5% drop. But Indian Oil followed suit with 2.4% decline, while Adani Total Gas, HPCL, Mahanagar Gas, Aegis Vopak Terminals, Oil India, BPCL, and GAIL India dropped by 1.5% to over 2%.

The decline in OMC stocks comes after a hike in retail prices of petrol and diesel by Rs 3 per litre last week. While natural gas companies like MGL, GAIL, Adani Total Gas, and IGL tumbled after hike in CNG rates by Rs 2 per Kg across major metro cities.

As per analysts at Systematix Institutional Equities, the latest Rs 3 per litre fuel prices hike, following the Prime Minister's austerity appeal, is just the beginning of a larger correction.

Explaining the impact of West Asia war and elevated crude oil prices on OMCs, analysts said, "By our estimates, this initial adjustment covers only 7-8% of the cumulative under-recoveries from three months of selling fuel at unchanged prices, a burden estimated at ₹1.7-1.8 trillion. Several more rounds of hikes will be needed simply to recover past losses, and this is against the backdrop of crude potentially remaining anchored above $100 per barrel."

Heavyweight stocks ONGC, Petronet LNG and Indraprastha Gas is down by 0.1% to 0.5% accordingly.

On the other hand, shares of Castrol India and Reliance Industries traded marginally up as they recovered early losses. Aegis Logistics emerge as top performer with 1.25% upside.

The latest shock to OMCs is the additional windfall tax on petrol.

Windfall Tax On Petrol, Diesel, ATF

In the latest update, the government levied a Special Additional Excise Duty (SAED) or windfall tax, of Rs 3 per litre on petrol but reduced the windfall tax on diesel exports to Rs 16.5 per litre from earlier Rs 23. Furthermore, windfall on jet fuels is lowered to Rs 16 from the earlier Rs 33 per litre.

The companies pay windfall tax to the government during the export of fuel products.

Windfall taxes are imposed on companies and industries during unprecedented times such as geopolitical crisis, pandemics, wars, or supply shortages. These are applied to companies who are expected to reap gains from external circumstances.

One of the examples is when the government imposed a windfall tax on July 1, 2022, after Russia invaded Ukraine, which led to a sharp surge in crude oil prices to $150 per barrel. Some oil and gas companies witnessed substantial profits from the external circumstances, which prompted the government to impose a windfall tax on these industries.

As per Bajaj Finserv website explainer, windfall taxes are majorly disadvantageous to companies as they reduce profits. Heavy taxes could also curb innovation as companies may be forced to limit their investment in research and development efforts. Also, companies or industry may transfer the burden to consumers to sustain their profit margins, which will likely spike market costs for consumers.

Crude Oil Prices Today

Currently, US WTI Crude oil price traded near $108 per barrel, with nearly 2.5% gains from previous session. Meanwhile, Brent Crude surged by 2% to above $111 per barrel.