India imports half its crude and LNG through a waterway that is now closed. The oil basket reaction could be mixed.
The war in the Middle East has stopped being a headline risk for Indian energy investors. As of this week, it is a balance sheet event. US and Israeli strikes on Iran, followed by Iran’s closure of the Strait of Hormuz, have severed roughly 50% of India’s crude oil and LNG imports in the space of two days.
Brent has spiked above USD80 a barrel. Spot LNG prices have doubled week-on-week to USD25 per mmbtu. Diesel cracks have hit USD30-40 a barrel. Freight rates are climbing. Insurance coverage has been disrupted. The Middle East has been hit severely and companies operating here like L&T have been hit too.
The critical question for retail investors is whether the oil pack including ONGC, IOCL, BPCL, HPCL, GAIL or Petronet LNG is a moment to buy, hold, or quietly head for the exit? The answer is different for every one of these companies. Read on.
The Winners
If you own ONGC or Oil India, the war is, bluntly, good for your portfolio. These are companies that produce oil and sell it at global prices. When Brent goes up, their earnings go up in a near-linear fashion. Says Emkay Global, for every USD5 per barrel increase in Brent above USD70, ONGC and Oil India’s standalone EPS rises by 13% and 10% respectively. With Brent now above USD80, that is a meaningful earnings upgrade already baked in. Emkay has raised target prices on both — ONGC to Rs315 and Oil India to Rs550 — building in USD70 per barrel Brent for the long term. Both carry an Add rating.
The Complicated Middle
Indian Oil, BPCL and HPCL are harder to read, and that complexity is exactly what retail investors tend to underestimate in a crisis. On the surface, higher oil prices hurt refiners because their raw material — crude — gets more expensive. Diesel marketing margins have already turned sharply negative, at around minus Rs15 per litre currently, down from a healthy USD20-28 per barrel in the third quarter. That is a painful number. But says Emkay Global, OMCs are likely to see “better EBITDA quarter-on-quarter in Q4, on lag in RTP accounting, higher core GRMs, and potential inventory gains of USD5-6 per barrel” at current rates.
In plain English: they bought crude cheap before the war started, and that inventory is now worth significantly more. Emkay retains Buy on all three OMCs, trimming only HPCL’s target marginally to Rs520 to reflect greater marketing volatility.
The key risk is how long Hormuz stays shut — OMCs carry 30-35 days of crude stocks and 20-30 days of product inventory. Beyond that window, refining runs get cut and the inventory gains reverse into a supply crisis. Watch the timeline carefully.
The Qatar Problem
Petronet LNG is where the damage is most visible and most immediate. The Ras Laffan LNG liquefaction plant in Qatar — which supplies 7.5 mmtpa to Petronet under a long-term contract — has been shut down. Petronet has already declared force majeure.
LNG imports are down 50%. Dahej terminal utilisation could fall to 77% in the current quarter if the disruption lasts the full month. Emkay retains a Buy on Petronet with a target of Rs360, noting that the Ras Laffan plant is undamaged and can restart quickly, and that higher trading gains offer some offset. GAIL faces similar volume pressure and has already begun informing industrial customers of supply cuts.
Of course, much will depend on how fast the war gets resolved. Says Emkay Global, while “visibility on the direction of the conflict is low,” the firm believes “the criticality of Middle East energy flows to world markets would drive resolution of the crisis” — though it cautions that “a week or two may be required for complete normalisation.” That is the timeline every Indian energy investor needs to be watching right now.
