Kotak Raises FY27 Crude Oil Forecast to $90/bbl
Kotak Institutional Equities raises FY27 crude oil forecast to $90/bbl due to supply disruptions, while noting OMCs have a cushion against price spikes.
Kotak Institutional Equities has adjusted its crude oil price outlook for the 2027 fiscal year, raising its assumption to USD 90 per barrel from the previous estimate of USD 85. The shift comes as global markets grapple with ongoing supply disruptions and heightened price volatility.
Geopolitical Tensions Drive Price Hikes
The brokerage pointed to the persistent conflict in West Asia as a primary driver for the revised forecast. According to the report, the disruption caused by this conflict has lasted for seven months with no clear indication of when normalcy might return. While global oil markets have shown resilience, the lack of visibility regarding the normalization of supply has forced a more cautious pricing outlook for FY2027.
Despite the upward revision for 2027, Kotak has maintained its long-term crude price assumption at USD 75 per barrel for FY2028 and beyond.
OMCs: A Cushion Against Volatility
While higher crude prices are expected to keep earnings for Oil Marketing Companies (OMCs) under pressure during FY2027, the report suggests these companies are better prepared than before. Recent shifts in domestic fuel pricing have provided a significant buffer.
Key factors contributing to this protection include:
- A previous excise duty cut of Rs 10 per litre.
- An increase of approximately Rs 7.5 per litre in retail prices for petrol and diesel.
These adjustments have effectively raised the break-even crude price for OMCs to a range of USD 102-105 per barrel, providing a safety net against short-term price spikes.
LPG Challenges and Future Outlook
Despite the cushion in fuel retail, the report highlights a significant near-term financial burden regarding Liquefied Petroleum Gas (LPG). Kotak estimates that LPG under-recoveries could reach roughly Rs 243 billion in the second quarter of FY2027. This is due to domestic LPG prices remaining static while international prices remain elevated.
Looking ahead, the brokerage anticipates a strong rebound in earnings for FY2028-29, provided crude prices moderate. As prices stabilize, OMCs are expected to retain higher marketing margins.
Strategic Recommendations for Resilience
To navigate this volatile landscape, the report suggests that OMCs must focus on strengthening their resilience through strategic investments. Key recommendations include:
- Increased investment in crude oil storage.
- Expanded LNG storage capabilities.
- Accelerated investments in city gas by refiners to substitute domestic LPG with piped natural gas.