Kotak Institutional Equities raised its FY2027 crude oil price assumption to $90/barrel due to supply disruptions. The report suggests Indian oil marketing companies (OMCs) have a cushion to absorb short-term spikes, despite near-term LPG burdens.

Kotak Institutional Equities has raised its crude oil price assumption for FY2027 to USD 90 per barrel from USD 85, citing prolonged supply disruption and elevated oil price volatility, while saying Indian oil marketing companies (OMCs) have enough cushion to absorb short-term price spikes, according to its latest report.

Crude Price Assumption Hiked to $90

“Driven by higher prices so far, we raise FY2027E oil price assumption to US$90/bbl (from US$85/bbl),” the report said.

The report said the West Asia conflict and the resulting disruption have persisted for seven months with no clear visibility on normalisation. It has retained its crude price assumption at USD 75 per barrel for FY2028 and the long term. “The West Asia conflict and the resulting large oil supply disruption have now persisted for seven months, with no visibility on normalization,” Kotak said, adding that global oil markets have remained resilient despite the disruption.

Impact on Oil Marketing Companies

The report further said the higher crude assumption would keep OMC earnings under pressure in FY2027, but the companies have gained some protection from changes in fuel prices.

A Rs 10 per litre excise duty cut and about Rs 7.5 per litre increase in petrol and diesel retail prices have raised the OMCs' break-even crude price to around USD 102-105 per barrel. “With geopolitical risks and oil-price volatility elevated, a rollback appears unlikely until risks ease and prices decline materially,” the brokerage said.

The report expects limited scope for another petrol and diesel retail price increase in the near term, while saying earlier excise and retail price changes could be rolled back only later as crude prices ease. It expects strong second-quarter results to offset losses incurred in the first quarter.

Near-Term LPG Burden

The report also flags a significant near-term burden from liquefied petroleum gas (LPG). Kotak estimates LPG under-recoveries could reach about Rs 243 billion in the second quarter of FY2027, as domestic LPG prices remain unchanged while international LPG prices stay elevated.

Future Outlook and Recommendations

The report further expects the earnings pressure to ease if crude prices moderate. “As oil prices moderate, OMCs will likely be allowed to retain higher marketing margins, driving strong earnings rebound in FY2028-29E,” it said.

The brokerage also said the prolonged disruption highlights the need for OMCs to strengthen their resilience through investments in crude oil and LNG storage, while refiners may accelerate investments in city gas to substitute domestic LPG with piped natural gas. (ANI)

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