InvestorQ : Why did oil companies like ONGC and RIL rally on Thursday and partially on Friday?
manisha Kolvenkar made post

Why did oil companies like ONGC and RIL rally on Thursday and partially on Friday?

Crowny Pinto answered.
1 month ago

The rally in oil stocks was on the back of expectations that the government may finally withdraw the windfall gains tax or at least reduce the total impost. This came up after the price of Crude fell from $120/bbl to just about $96/bbl on global recession fears. The windfall tax was imposed as a counter to high oil prices, so with the prices coming down, it was only logical that the windfall tax be removed or reduced. After all, why a windfall tax when there was no windfall and the tax was actually leading to losses.

But, first a quick background on the concept of windfall tax in the Indian context. It may be recollected that on 01st July, the government had levied a windfall tax on oil exports as well as on domestically produced and extracted oil. It was about Rs6 per litre on petrol, Rs13 per litre on diesel and at Rs23,250 per tonne on extracted oil in India. With windfall profits vanishing with the fall in oil prices, the argument on the street is that the windfall tax should also see a gradual, if not total, winding down.

This is still report based. In fact, a report by Bloomberg suggested that the Centre was considering a cut in the windfall tax due to the crash in global crude oil prices. This had then led to a rally of 3% to 6% across oil stocks like RIL, ONGC, OIL, MRPL and Chennai Petro. This sharp fall in oil came on the back of fears of recession after Fed hinted it may raise the rates by a full 100 bps instead of just 75 bps. The sharp fall in crude prices below the $100/bbl mark, takes away any windfall there is for producers and questions the windfall tax.

Brent crude prices touched a 3-month low of $97.35 per barrel on the back of concerns over Fed hawkishness and China slowdown. Remember that the US and China jointly account for $40 trillion of world GDP but their actual impact on output, supply chains and consumption is a lot more important to the world economy. Slowdown expectations led to crude falling and even compressed the GRMs of refining companies. Now it looks like the windfall tax would end up giving negative returns to producers, questioning its very relevance.