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

Petrol and diesel prices are down by $40-50 per barrel from month-ago levels

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, Citi said on Tuesday, making a case for a review of the windfall tax announced on July 1.

CLSA had made a similar point last week, saying a crash in refining 

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, Citi said on Tuesday, making a case for a review of the windfall tax announced on July 1.

CLSA had made a similar point last week, saying a crash in refining margins of diesel, petrol, and aviation turbine fuel (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 ATF by Rs 2 per litre and scrapped the Rs 6-per-litre levy on petrol exports. It also cut the tax on domestically produced crude by nearly 27 per cent to Rs 17,000 per tonne.

The exemption of special economic zone (SEZ) exports, said Jefferies on Wednesday, reduced the impact on Reliance Industries’ (RIL’s) gross refining margins from $7-9 per barrel earlier to $1 per barrel now. The company exports 55 per cent of its refining output from its SEZ located at Jamnagar. 

“This will allow the SEZ refinery to participate in any upside to refining margin improvement from hereon. This indicates that the government is ready to make policy adjustments swiftly to accommodate market realities, with oil lower and refining spreads down sharply over the fortnight,” said Jefferies.

Following the update, shares of RIL were up over 4 per cent to Rs 2,545.05 apiece intraday, before giving up some gains on the BSE. The scrip finally settled at Rs 2,501.4 at the end of trade on the BSE — up 2.5 per cent over the previous day’s close.

Chennai Petroleum Corporation (CPCL), meanwhile, rallied 11 per cent to Rs 296.4.

Oil India (OIL) gained 8 per cent to Rs 201.8, followed by Oil and Natural Gas Corporation (ONGC) up 7 per cent at Rs 136.4 and Mangalore Refinery and Petrochemicals (MRPL) up 5 per cent at Rs 76.3 in intraday trade.

These stocks finally settled at Rs 285.7 (CPCL), Rs 197.4 (OIL), Rs 132.6 (ONGC), and Rs 76.3 (MRPL) per share on the BSE.

On Wednesday, both the S&P BSE Sensex and the BSE Oil & Gas were up 1.2 per cent, touching 55,446.7 points and 18,454.93 points in intraday trade. The two indices eventually erased some gains, settling at 55,397.53 points (BSE Sensex) and 18,339.43 points at the end of the day’s trading session.

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

“The Ministry of Finance has announced an unwinding 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 a steady normalisation 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 reduction in overhang as a result of the tax cut. Their equity valuations would eventually start pricing in high sustainable energy margins.

Brent crude price had corrected sharply in the past month on recession fears, moving from $120 per barrel to $95.52 per barrel last week.

“The refining spread for diesel has almost halved from the peak seen in June of $55-60 per barrel to $30 per barrel. Similarly, we have seen ATF spreads crash from $50-55 per barrel to $25-30 per barrel. Gasoline (petrol) spreads have also been slashed from $30-35 per barrel last month to $10-15 per 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 an export and manufacturing-friendly regime. A review will be seen as a relief for RIL. It will be a big trigger for ONGC and OIL as these stocks bake in a crude realisation of only $40-45 per barrel,” it said.