Energy Stocks Rally in War Fears — Top 3 Stocks to Watch

The fear of escalating geopolitical tensions in the Middle East is contributing to rising global crude oil prices above $90 - $100 per barrel. This has caused concern for India's economy as an oil-importing country but has created a substantial spike in certain energy stocks in India. As oil prices rise, upstream producers will participate as their revenues and profits will increase.

With the war's impact on energy stocks playing out, domestic oil and gas companies have been standing out among the volatility, highlighting the risks and opportunities present in the situation. Here, we are examining the energy sector outlook, the cause of oil and gas stocks in India, and the top energy stocks in India to keep an eye on. Whether you are an experienced investor or a beginner, understanding this is paramount in an unpredictable context.

Effect of the War on Energy Stocks

Due to the conflict, several major shipping routes have been impacted, raising concerns about ongoing supply shortages. Some days, Brent crude increases by approximately 7 to 8%. This is worrying for India, which is negatively affected financially due to the inflation of the US dollar, devaluation of the Indian rupee, and increased costs of US imports due to reliance on imported crude, which accounts for approximately 85% of total imports. However, not all energy stocks are affected negatively during the war's impact on energy stocks as they may react differently.

Downstream players have been negatively affected by the impact on margins due to input costs increasing at a greater rate than the rate at which costs can be passed on to downstream consumers. Meanwhile, upstream exploration and production (E&P) dominant players have experienced significant positive impacts due to increased margins as input prices rise. It is estimated that with a $1 increase in Brent Crude, margins for dominant players are positively impacted by 1.5% to 2%. 

This is a selective increase in Indian energy stocks and may be adversely affected due to previous geopolitical tensions, whereby domestic producers negatively impacted the energy market.

The Strait of Hormuz remains an active conflict point, controlling almost 20% of the global oil trade and a sizeable portion of the oil trade of India’s imports from Iraq, Saudi Arabia, and the UAE. Its oil supply disruptions keep oil prices high due to supply concerns. In terms of oil and gas stocks in India, this means a positive impact in the short term for those with strong domestic reserves and production. Despite the Nifty and Sensex nearing yearly lows, many investors are switching to these companies.

Oil and Gas Stocks in India: The Backbone of the Energy Mix

The rapidly growing demand for energy due to economic growth, urbanisation, and increased industrial production demand will also impact the oil and gas stocks involved. Even with the government’s large-scale plans for greater use of renewable energy, domestic oil production from companies such as ONGC will help reduce the country’s imports and increase the country’s self-reliance. One-stop, vertically integrated companies from upstream oil and gas exploration through to downstream oil and gas refining and retailing will also assist in this regard.

The contribution of the oil and gas stocks in India to the economy and to employment is also very significant. Although the public sector is dominant, the inclusion of the private sector also adds diversity. With the high levels of fear associated with the current global conflicts, these stocks act positively. With the current prices of oil, the energy sector will also continue to exhibit a high level of volatility. The energy sector outlook is also a little complex, as there is an overlap in the short-term with the increase in the price of oil and the longer-term trends associated with the use of cleaner energy.

The sector benefits from government initiatives, such as increased E&P bidding rounds and developed infrastructure. However, there are still obstacles, such as enduring regulatory burdens from subsidies and environmental protection initiatives. For oil and gas investors, the market offers both defensive (steady demand) and cyclical (upside price shifts) opportunities.

Energy Sector Outlook: Anticipate Short-Term Volatility, But Long-Term Growth

The outlook for the energy sector in India is bearish due to short-lived geopolitical risks. In the next 6-12 months, there is a high chance that oil prices will exceed $100-$120 as the Middle East Conflict continues. This will boost profits for upstream operations. Most analysts agree that domestic producers will benefit as oil prices remain above $70-80.

India’s long-term energy goals are to expand green hydrogen, solar, and wind technologies to achieve 500 GW of non-fossil fuel capacity by 2030. This will create opportunities for hybrid energy projects, including the oil and gas sector. More specifically, natural gas will continue to be in demand for power, fertilisers, and city gas distribution.

With an annual increase of 6-7%, India's economy will continue to improve and will place India as the leader of global energy demand through 2050. The energy sector outlook remains optimistic for the companies that combine traditional practices with new, more sustainable technologies available through investments. In the scope of the global economy, the final resolution to the war could cause a drop in economic energy prices or a return to more controlled global trading based on more severe climate policies. Overall, the energy sector will continue to improve in the climate economy and energy stocks in India will continue to improve.

Top 3 Stocks to Watch: Leading the Rally in Energy Stocks India

In the face of war's impact on energy stocks, the upstream exposure, solid fundamentals, and price activity of three names have been very positive. In the context of an economic energy crisis, these top energy stocks in India are expected to be very attractive.

1. Oil and Natural Gas Corporation (ONGC)

ONGC is the leader in the exploration and production sector in India and benefits from increased crude price exploitation. It has vast domestic markets and production exceeding 30 million tonnes oil equivalent (toe) on an annual basis. Its revenue is about oil prices. ONGC shares have increased by 3.5 to 5% in recent sessions linked to war fears, leaving the broader market behind.

JM Financial, and similar other firms, have target prices of ₹320, based on $70 Brent price forecasts, and thus have positive revisions in oil price forecasts. Other analysts have Buy Recommendations. JM Financial’s forecasts indirectly suggest Buy Recommendations from other analysts. JM Financial’s forecasts, along with ONGC’s stable pipeline from upstream, and diversified portfolio in downstream (including gas commercialisation and offshore) provide stability.

Investors are looking for top energy stocks in India with strong government backing. Investors have a choice in JIO, ONGC, and Reliance. ONGC, along with OMCs, provides a high beta on the price of crude oil, a good measure of price elasticity. ONGC has a high return on equity, positive net present value from new legislation and new fields, and thus is in a good position with positive new legislation financing in the positive energy sector outlook. NG is a new field.

2. Oil India Limited (OIL) 

Oil India is another pure-play upstream producer. Oil India shares are similar to ONGC. Shares have increased by 3 to 4.5% on average during the recent highs of oil prices. With the company focusing on Northeast India and some overseas assets, it has an advantage with overseas prices. If Brent Crude oil stays over $70 for a sustained amount of time, it is expected to earn similar margins as ONGC, with some brokerage firms placing ‘buy’ targets for the stock at around ₹560.  

Oil India has an advantage in operational efficiency and an increasing production profile. Its recent performance and production increases have demonstrated the company’s sensitivity to supply shocks due to the recent wars, making it an ideal company to invest in for people looking to invest in oil and gas stocks in India. Its valuation is smaller than ONGC’s, and the attractiveness of investing in the company is heightened due to the smaller relative valuation multiples and relative dividend yields. 

The war's impact on energy stocks narrative positively showcases Oil India as a domestic producer succeeding when importers are failing. Further positive developments in output and exploration are expected to come, increasing the attractiveness of investing in OIL with the current volatility in the energy sector outlook.

3. Reliance (RIL) 

Reliance is prominent in the upstream oil and gas business (KG-D6 block and others) as they benefit from high crude prices and, in addition, the mega Jamnagar refinery offers some hedging in the complex via exports. Their shares have also been in focus during the latest waves, gaining 2–3% in prominent sessions despite wider pressure.  

At a market cap of over ₹18 lakh crore, Reliance’s scale, integration in petrochemicals, and synergy in retail offer protection on the downside. Analysts regard the upstream segment of the company as a growth engine, considering the wars. Reliance’s shift towards renewables through Reliance New Energy is a perfect fit with the energy sector outlook, as it combines the core oil and gas with future-oriented investments.

Conclusion

Upstream leaders like ONGC, Oil India, and Reliance are spearheading the selective rebound in oil and gas equities in India as a result of the war's impact on energy stocks. These top energy stocks in India demonstrate the industry's resiliency while the larger market struggles with import costs and inflation concerns.

Due to India's unquenchable energy demand and strategic policy support, the energy sector outlook is expected to stay strong over the medium to long term. Winners will be distinguished from the rest by remaining knowledgeable and flexible while geopolitical clouds persist. Keep a close eye on global developments, corporate production updates, and movements in oil prices. Energy equities in India have the potential to reward diligent, research-driven investors in this time of war fears and opportunity.

(Source: Reuter)