Monday, August 25, 2014

The upside and risks from oil sector reforms

Oil and gas sector that was stifled with regulations is now witnessing some hope. The much awaited diesel deregulation was introduced in a phased manner some time back. And the way crude prices are behaving now, it might not be too long when diesel prices become fully market determined. That might seem a compelling argument in favour of investing in state run oil companies. Infact, some of the well known brokerage reports believe that the upside in such stocks is as high as 100%.

However, there are some caveats that investors must keep in mind before getting carried away. The first is that a full deregulation will depend on whether crude prices can stay at low levels, something no one can bet on. And even if that happens, it will be no guarantee that diesel will be sold at market prices. It would be worth mentioning here that even after full deregulation; oil companies continued to sell petrol below the market prices and did not have complete freedom in pricing. And that was not even compensated later, being officially deregulated. Lastly, there is a threat of huge competition from private players. A lack of level playing field has kept them at bay so far. But once they become active in already overcrowded refining space, even price wars cannot be ruled out. In short, while upside due to the expected reforms are already getting reflected in valuations of oil companies, investors must be aware of potential pitfalls while making investing decisions in the oil and gas space

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