Drill, Drill, Drill: Will Trump's Strategy Deliver a Blow to India's Oil Firms?

Trump is back in the White House, and the oil market is headed for a major showdown. With the price of liquid gold surging past $75 per barrel and the US threatening sanctions on Russian oil, India’s position has become increasingly complicated as cheap commodity prices are now off the table.

A republican win and an already anxious OPEC+ (Organisation of the Petroleum Exporting Countries) doesn't go well when the oil price book has remained drenched with caution for the better part of the year.

On one page, Trump has made it clear that the commodity will bring back America's crown.

"We will drill, baby, drill and we will become energy independent, and even dominant again," that's what Trump's manifesto stated.

On the other page, the oil-producing nations are fighting their own battle to balance out the demand and supply play. Thanks to China's economic downtrend, dragging down the oil demand and geopolitical tensions in West Asia.

Also read|OPEC+ Delays Output Hike Amid China's Slow Demand and Rising Rival Supply

To offset the impact of decreasing price levels, oil-producing nations have implemented supply cuts in the hope of meeting the faltering demand. OPEC's first cut was carried out in late 2022, and word of the commodity street is that the same might continue in 2025 as well.

For India, the outlook slightly inclines towards optimism.

But only slightly.

Import expenses might experience a fall as supply increases coupled with easing inflation. But Trump's love-hate relationship with tariffs might complicate the scene a bit.

What's up with oil?

Oil prices have been on a downward trajectory since the last 2 weeks. The WTI crude oil index— benchmark for the US oil market— was trading just around $67. Whereas, Brent futures remained at $71.85 level on Friday.

The downtrend is quite visible as the industry is witnessing several key events concurrently, with Trump's win being the major one.

India, being the third-largest importer of oil, might see a decrease in input costs, which could eventually have a positive impact on the margins of domestic oil companies.

"Most of Trump's policies are likely to have a bearish impact on prices, there is significant upside potential in his focus on 'increased drilling' and trade policies. Lower crude oil prices reduce input costs, potentially improving refining margins and more profits," said Rahul Kalantri VP research analyst at Mehta Equities.

However, what might turn the optimistic picture upside down is the drilling cost, which refers to all the expenses associated with the exploration/building process of oil wells. This includes all the equipment, logistics and even the risk being incurred while creating bore wells.

"Additional US oil production means a well drilling cost requirement of $64 per barrel. Hence the degree of 'Drilling' would be muted. Going forward, in a couple of years these costs could scale up to $67 and $70 range as per the forward prices," Ventura Securities said in a report.

So, more production might happen, but only if prices stay high enough to cover these costs. Plus, the ongoing trade wars, like the imposition of heavy tariffs on the imports and exports of some nations, might make the situation more complex. This is largely because other countries might start putting in their own tariffs policy on American goods, oil included. If this scene comes into the picture, any type of fall in oil prices is unlikely.

A breather for Indian oil companies?

Q2 has not been a cheerful quarter for Indian OMCs (Oil marketing companies) with major players in the sector like IOC, HPCL, BPCL and ONGC experiencing a double-digit fall in net profit.

For IOC, the fall was the sharpest as the company witnessed a 99 per cent decline in its net profit to Rs 180 crore as compared to Rs 12,967 crore recorded in the corresponding quarter of the previous year.

Weak refinery margins were one of the major reasons for this sharp fall.

In the last 6 months, Nifty oil and gas has plummeted by over 5 per cent. Benchmark Nifty50, on the other hand, remained in the green territory and delivered a modest return of 6.2 per cent. Many analysts expect this trend to continue in Q3FY25.

But a prospective decline in oil prices might help Indian OMCs get back on momentum. "Indian Oil Marketing Companies (OMCs) like HPCL, IOC, and BPCL would see improved profit margins, as the cost of crude oil – their primary input – would fall. This is expected to drive a bullish trend in the stocks of these top OMCs, as their profitability becomes more apparent in a stable and lower-price oil environment," said Aamir Makda, commodity and currency analyst, Choice Broking.

However, there is a chance that oil prices might remain stable as geopolitical tensions calms and the "risk premium" fades off. Plus, OPEC might be struggling, but it still remains a major player in deciding oil prices.

"While we are not expecting oil prices to go down further on a sustainable basis if they do, it would raise the marketing margins of OMCs and bring down the post-windfall realisation for the upstream. Normalization of geopolitical issues may also spurt global economic growth, thereby raising the demand for oil. This would further provide support to oil prices," said Swarnendu Bhushan, co-head of institutional research at Prabhudas Lilladher Capital.