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US-Iran Tensions Push Crude Higher: Why MRPL and CPCL Could Gain From Rising Diesel Premiums
Amid US-Iran tensions, crude oil has again reached $95 per barrel. Normally, this puts pressure on oil marketing companies, but the tight supply of diesel has pushed refining companies' earnings to record levels. Which two companies could directly benefit from this? Read the report.
The fresh tension in West Asia between the United States and Iran is causing turbulence in the global crude oil market. Again Brent crude is priced at $95 per barrel on account of concern regarding disruption in crude oil transportation through the Strait of Hormuz. High crude prices are generally bad news for the Indian economy and the margins of national oil marketing firms, IOCL, BPCL, and HPCL, but on this occasion the other side of the story is quite bright.
The refining margins witnessed an unprecedented increase because of the shortage of diesel and jet fuel. The Intercontinental Exchange diesel crack margin surged by $6.6 per barrel to its highest-ever level of $84.4 per barrel. This level is the highest in nine years. In its recent research note entitled "Crude Compass," Choice Institutional Equities reported that the increase in diesel prices is much faster than that in crude oil prices, resulting in rocketing gross refining margins (GRMs) of pure refining companies.
Mangalore Refinery (MRPL) and Chennai Petroleum (CPCL) are attractive investment options. MRPL has been given a "buy" rating with a target price of Rs 215 from Friday's closing price of Rs 175.40, implying a potential upside of approximately 22.6%. This is primarily driven by diesel exposure and a rising diesel premium over crude. CPCL has a target price of Rs 1,540, implying a 6.1% upside. Strong refining capacity and improved GRMs are the main reasons for this.
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