Crude oil finally touched $100 a barrel this week. This did not cause any flutter in the Indian stock market. In fact, the entire oil sector has been in the midst of a strong rally in recent weeks. With crude oil at all-time highs, it is a good time to take a fresh look at prospects for the entire sector: upstream and downstream.
First, one needs to be bullish on the upstream sector. ONGC has been shackled far too long on fears of subsidy losses. While those fears are legitimate, current crude oil realisations should more than offset such losses. It is hard to build a case against ONGC. The same would hold for Cairn, with the caveat that Cairn's valuations look quite rich after the recent rally to Rs 265. Continued strength in crude oil augurs well for Reliance Industries as well, though a lot of the good news is in the price. Along with these biggies, the entire exploration and drilling space should remain strong. Stocks like Jindal Drilling, Selan Exploration and Shiv Vani Oil to name a few.
A bull case for downstream is slightly more difficult to construct. Yet, HPCL and BPCL have had significant rallies: both are up 40 per cent in the last one month. From their August lows they are up 75-80 per cent. Recent rumblings from the government have raised hopes that some policy action is inevitable, maybe a combination of modest fuel price hikes and duty tinkering. These may provide some relief to the oil marketing companies and improve sentiment but beyond that it is difficult to argue significantly in their favour, from the current price levels.
Crude oil threatens to settle at a much higher price band and it is hard to imagine how the government will allow pass-through in a pre-election year. The easy money has probably been made out here. Oil remains a good hunting ground for 2008, but the real gains may come from the upstream and allied stocks.