Considering there is a upsurge of Crude Oil Prices and government has requested the companies not to raise prices(atleast till people vote in Karnataka elections).
How come oil marketing companies like IOC, BPCL is gaining now? They should bleed badly is my thought process…Anyone Please Explain?
Nope
Companies like HPCL, BPCL, IOCL etc. comes under downstream sector of oil and gas industry while ONGC, OIL etc. comes under upstream sector.
Now let’s understand what’s the difference between upstream and downstream sector of oil and gas industry.
The oil and gas industry is usually divided into three major sectors: upstream, midstream and downstream.
The upstream oil sector is also commonly known as the exploration and production (E&P) sector. The upstream sector includes searching for potential underground or underwater crude oil and natural gas fields, drilling exploratory wells, and subsequently drilling and operating the wells that recover and bring the crude oil and/or raw natural gas to the surface.
The downstream sector commonly refers to the refining of petroleum crude oil and the processing and purifying of raw natural gas, as well as the marketing and distribution of products derived from crude oil and natural gas. The downstream sector reaches consumers through products such as gasoline or petrol, kerosene, jet fuel, diesel oil, heating oil, fuel oils, lubricants, waxes, asphalt, natural gas, and liquefied petroleum gas (LPG) as well as hundreds of petrochemicals.
The midstream sector involves the transportation (by pipeline, rail, barge, oil tanker or truck), storage, and wholesale marketing of crude or refined petroleum products. Pipelines and other transport systems can be used to move crude oil from production sites to refineries and deliver the various refined products to downstream distributors. Natural gas pipeline networks aggregate gas from natural gas purification plants and deliver it to downstream customers, such as local utilities.The midstream sector may also include natural gas processing plants that purify the raw natural gas as well as removing and producing elemental sulfur and natural gas liquids (NGL) as finished end-products.
When we say the oil price goes up, we mean the prices of crude oil goes up. As the crude oil is the final product of the upstream companies (ONGC) which will now be sold at higher prices, the upstream companies will make profit but on the other side, for downstream companies (HPCL) , crude oil is a raw-material which now they will have to buy at higher price and their final selling products are various refined products like petrol, diesel etc. The prices of these refined products may not necessarily increase by the same proportion as of the crude oil. As a result, the downstream companies starts loosing money.
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M working in Oil n Gas industries
Wow what a detailed yet so simple explanation!!!
I have been following news for last 4-5 years just to learn/understand about company and businesses. I have never come across the term upstream, midstream and downstream .
Where can I learn more about their business? How they operate ? Basically how can I deep dive these companies?
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Traders think that for less time effect , after election they are free to raise price.
Traders take it as positive point for moment/sentiment.
As investor , crude price hike should affect adversely oil marketing company.it is also reflecting from last 2 month daily chart…
IOC also has formed bearish pattern on daily timeframe with bearish pin bar reversal.
On longer term it will affect.
Issue is government can also pressure ONGC to take losses by providing raw crude at lower price.
( There is profit but not best due to government involvement)
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This is such a valuable information for many traders like me, who could not figure out till now, why some oil Industry companies go up and others goes down at the same time.
I have not come across such clear explanation on this co-relation anywhere on the net.
SALUTE.
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Thanks for the detailed explanation.
Regarding govt fixing prices, how can it be true as most petroleum products are deregulated - except may be kerosene and LPG. So how can they control the prices. Companies buy crude at international prices and they sell at international prices. It may also be noted that there are private companies like reliance, essar etc. How can govt tell them to sell at controlled prices. I am not sure if it can work like that.
Dirty politics…
If government is not doing this…
Then why there is no price hike in petrol diesel when all over world crude price hike is issue…
They are just delaying it. For vote bank.
Price hike should be directly reflected in price…
Lovely thread. Very useful information. Big thanks.
One more question:
Does it make sense to stay invested in any sector or stock that is so regulated or interfered by government?
For example: sugar, tobacco, petroleum, PSUs? Are there exceptions to this rule? Or, the exceptions are so limited that it’s not worth INVESTING in these?
I don’t deny the trading opportunities though.
Well I don’t know 
It may be a temp. arrangement with the agreement they can recoup their losses once election is over. We will have answers in a couple of days.
whatever it is it can’t go on like this for long. Govt no longer supplies crude to refineries, so how can they say ok you buy at market prices and sell at controlled prices. Refiners will be shut in no time.
hi
all crude purchase rates are agreed between supplier and buyer a few months in advance contracts. they are not buying at today’s rate. hence it will be difficult to quantify the profit/loss by common man. only the companies know those things. common man knows only the distribution’s front end.
I am not sure if that’s right.
Company’s buy at spot rates as well as forward contracts, then on country to country agreements etc. It’s a complicated process. Most of the Indian oil companies has trading desks abroad. eg. london. And some even simply buy and sell crude and make huge profits. Why not they being commercial entities they can do it
seems he’s saying that OMCs are under losses in such situations, so their prices should plunge.
here too seems you said the same thing that they incur loss in such situations, but this didn’t explained why they’re gaining now? Is it like when they’re in loss their prices surge?
Well…Indian refining industry is one which is run very efficiently, may be comparable with its peers the world over. Hence if govt allow them to run freely, they should make bumper profits. There lies the crux of the problem…though the OMC’s are supposed to be free, in reality they are not. Govt owns majority shares and can control them one way or other. Hence they may be forced to bear the subsidy or delay payments etc. Hence there is a negativity attached to them in the current scenario. However it’s beaten down so badly that what u may be seeing probably is a bounce back. Long term they must be good.