Oil price increase bodes well for OMCs

The increase in oil prices bodes well for the oil marketing companies, but generally it impacts the economy with a lag and has multiplier effect on most economic sub-sectors, as it effectively raises the aggregate cost of industrial production. These views were shared by most of the analysts at the local brokerage houses, who said that an increase in oil prices is generally positive for the OMCs in the form of inventory gains and higher rupee margins.
Abdullah Amin, research analyst from AKD Securities, said that contrary to general market consensus, the oil marketing companies (OMCs) are gradually becoming the biggest beneficiary of the rising international oil prices (market consensus: E&P companies are the biggest beneficiary).
So far, OCAC has raised oil prices by approximately 21 percent in the last few months, while on the other hand, output prices for E&P companies (gas producers) are capped at $36 per barrel.
Furthermore, the sector has also been witnessing strong volume growth of 17 percent in seven months of the current fiscal year as compared with the same period last year, he added.
Tanvir Abid, head of research at Live Securities, said the timing of oil price increase is important, especially in context of PSO's renewed privatisation process. The boost to PSO's profitability ensuing from the oil price increases would enable the government to attract high profile bidders and fetch an attractive price for the company's strategic sale. "Of the cumulative rise since mid-December, we estimate the post-tax impact on PSO and Shell's FY05 EPS Rs 5.4 and Rs 9.5, respectively", he added.
Inflationary numbers are to maintain their firm posture. The Consumer Price Index (CPI) during the first eight months of the current fiscal has averaged 8.91 percent, while the inflation rose by 9.95 percent during February 2005, approximately, 144 basis points higher as compared to 8.51 percent during the previous month. Overall CPI during FY05 to range between 9.0 and 9.5 percent significantly above the government's revised 7 percent target.