Euphoria over fuel deregulation bit early
Public sector oil companies stole the show for the second session in a row. Shares of Bharat Petroleum, Hindustan Petroleum and Indian Oil were up 3-8 per cent during the day. This comes on top of the 10-14 per cent jump in stock prices on Friday. Upstream oil companies ONGC and OIL also saw their stock prices move up 2-3
per cent today. However, there are still some concerns and questions surrounding the sector, in spite of the air of optimism that has been created over the past few weeks.
Some analysts feel that the euphoria in stock prices of oil companies is unwarranted. “We expect government to be the prime beneficiary of the higher oil prices,” says HSBC Research, a brokerage house. The projected losses of the public sector oil companies for FY11 — Rs 53,000 crore — will be higher than the total loss of Rs 46,100 crore for FY10, says the brokerage. The higher prices would mean subsidies will fall by Rs 14-20,000 crore.
The government is likely to take a major share of this benefit as it tries to control the fiscal deficit, says the broker.
There are also some other gray areas. According to JP Morgan, the three big concerns are that the government hasn’t yet clarified a formula for sharing fuel subsidies, it still reserves the right to intervene if crude oil prices spike and no timeline has been indicated for freeing diesel prices.
Diesel is the single largest selling petroleum product in India and accounts for about 40 per cent of the fuel consumed. As of now, oil companies will still be selling diesel prices at a loss. Also, the big fear in the markets is what would happen in case crude oil prices rise. In 2002, oil sector had been deregulated for most part, but high crude oil prices internationally forced a gradual rollback.
However, the borad opinion in the market seems optimistic. While oil companies will continue to record losses, markets are factoring in deregulation of key auto fuels — diesel and petrol.
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