Saudi Arabia has unleashed a price war after the Organisation for Petroleum Exporting Countries (Opec) and its allies failed to come to an agreement on crude oil production cuts last week.

Saudi’s Aramco slashed its crude pricing for Asia by $4-6 per barrel, in an effort to push more barrels into the market. For Indian state-owned refiners such as Hindustan Petroleum Corp. Ltd (HPCL) and Bharat Petroleum Corp. Ltd (BPCL), this is a boon, as lower procurement cost will boost refining margins. Of course, the gains will be offset by inventory losses, and the general softness in demand. Nevertheless, HPCL and BPCL rose 7-8%, indicating analysts expect net benefits from the drop in crude prices.

Analysts at Kotak Institutional Equities expect BPCL, HPCL and Indian Oil Company Limited (IOCL) to benefit from lower oil prices in multiple ways — improvement in marketing margins, reduction in fuel and loss, increase in crude discounts from Middle East region, and lower working capital.

Fuel and loss refers to the cost that refineries incur due to the fuel consumed to run the refineries and the fuel lost in the system while processing crude oil into petroleum products.

“Resulting gains will allow these companies to offset one-time losses on inventory as well as sustained weakness in underlying refining margins," pointed out Kotak analysts in a report on 9 March.

Brent crude oil prices slumped 30% in early deals on Monday, the sharpest one-day fall historically.

Shares of producers, Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd fell 9-11%, with ONGC shares falling below ₹80 apiece. Lower oil prices pose a direct risk to earnings of these companies, notwithstanding attractive valuations.

The sharp fall in crude prices has repercussions for Reliance Industries Ltd as well.

The Saudi stock market sank more than 8% on Sunday with shares of Saudi Aramco slipping below its initial public offering price.

With events unfolding, some analysts anticipate delays in Reliance Industries Ltd’s (RIL) debt reduction plan timelines.

Reliance plans to become a zero net debt company by 31 March, 2021, and the 20% stake sale to Aramco is crucial for the former to achieve the debt target. Not surprisingly, the Reliance stock declined more than 7% on Monday on the National Stock Exchange. Since the refining business now accounts for only 20% of RIL’s enterprise value, the drop in prices is not expected to have a major impact on its valuations, apart from the concern about the Aramco deal.

Analysts estimate further downsides to oil prices. Some say the failure of the Opec+ deal essentially means there is no floor to prices as now there is no restriction on how much each member produces.

Note these events come at a time when demand outlook remains weak, especially with Covid-19 concerns looming large.