Oil stocks surge as govt cuts windfall tax on fuel exports, RIL up 4%

Shares of oil companies rallied on Wednesday after the government cut windfall taxes on fuel exports on the back of falling global prices.

Petrol and diesel prices are down $40-50 per barrel from month-ago levels, brokerage Citi said on Tuesday, making a case for a review of the windfall tax announced on July 1.

Brokerage CLSA had made a similar point last week, saying a crash in refining margins of diesel, petrol, and ATF coinciding with a cool-off in crude oil prices from their peaks in June had diminished the super-profits of refiners.

On Wednesday, the government reduced the windfall tax on diesel and aviation turbine fuel (ATF) by Rs 2 a liter and scrapped a Rs 6-per-litre levy on petrol exports. It also cut the tax on domestically produced crude by nearly 27 percent to Rs 17,000 a tonne.

Following the update, shares of Reliance Industries (RIL) were up over four percent to Rs 2545.05, topping Rs 17 trillion in market capitalization, before giving up some gains on the BSE. The scrip had settled at Rs 2,442.20 on Tuesday.

Chennai Petroleum Corporation rallied 11 percent to Rs 296.40; Oil India gained 8 percent to Rs 201.80, followed by Oil and Natural Gas Corporation (ONGC) up 7 percent at Rs 136.40, and Mangalore Refinery and Petrochemicals up five percent at Rs 76.30 in intra-day trade.

On Wednesday, both the BSE Sensex and BSE Oil & Gas index were up 1.2 percent, touching 55,446.70 points and 18,454.93 points in intra-day trade.

In a report released Wednesday, brokerage Morgan Stanley said that RIL, ONGC, and OIL were key beneficiaries of the reversal in windfall taxes.

“India’s Ministry of Finance has announced an unwind of windfall taxes on fuel exports and oil a lot quicker than anticipated. While in absolute terms the windfall taxes are still high, we believe the steady normalization in local fuel availability, stability in oil prices and global fuel margins as well as currency stability will help further reduction in windfall taxes in the future,” the brokerage said.

Morgan Stanley also said that RIL, OIL, and ONGC would see a reduction in overhang as a result of the tax cut. Their equity valuations would eventually start pricing in high sustainable energy margins as windfall taxes were cut further by the government.

“We believe RIL should get priced at $13-15 per barrel sustainable refinery margins, while ONGC will get priced at $75-80 per barrel oil and $6 metric million British thermal units (MMBtu). The two should imply 25-40 percent upside to equities as energy markets are expected to remain tight despite the current volatility in oil and reduction in global fuel margins from peak levels,” Morgan Stanley said.

The Brent crude price had corrected sharply in the past one month on recession fears, moving from $120 per barrel to $95.52 a barrel last week. On Monday, however, the benchmark rose sharply to touch $106.27 a barrel on concerns that global supplies would be limited, remaining largely volatile on Tuesday and Wednesday. The benchmark touched $106.12 a barrel on Wednesday, down 1.15 percent over the previous day’s close.

“The refining spread for diesel has almost halved from the peak seen in June 2022 of $55-60 a barrel to $30 a barrel. Similarly, we have seen ATF spreads crash from $50-55 a barrel to$25-30 a barrel. Gasoline (petrol) spreads have also been slashed from $30-35 a barrel last month to $10-15 a barrel,” CLSA said in its report last week.

“If this tax remains for long, we fear it may hamper the position of this government as export and manufacturing-friendly regime. A review will be seen as a relief for Reliance. It will be a big trigger for ONGC and Oil India as these stocks bake in a crude realization of only $40-45 per barrel,” it said.