Oil and gas stocks witnessed selling pressure on Friday after the government approved a ₹3 per litre hike in petrol and diesel prices, along with a ₹2 per kg increase in CNG prices. Sentiment was dented amid concerns that fuel price increase was lower than market expectations amid the continued surge in global crude oil prices.

The sell-off was broad-based with all major energy companies declining despite the broader market trading higher, with the benchmark indices – Sensex and Nifty 50 - rising around 0.5%.

Among the biggest losers, shares of Gujarat State Petronet plunged over 7% on the NSE, while Hindustan Petroleum Corporation Limited (HPCL) fell nearly 2%, Bharat Petroleum Corporation Limited (BPCL) declined around 1.9%, and Indian Oil Corporation Limited (IOCL) slipped over 1.4%. Shares of Reliance Industries Limited (RIL) also traded lower by nearly 1.4%.

City gas distribution companies witnessed mixed moves. Shares of Indraprastha Gas Limited (IGL) dropped around 1.8%, while Mahanagar Gas Limited (MGL) fell over 1%. However, Gujarat Gas managed marginal gains.

Petrol and diesel prices had remained largely unchanged since April 2022, barring a one-time ₹2 per litre cut announced ahead of the 2024 Lok Sabha elections. The latest increase comes amid a sharp spike in crude oil prices following escalating geopolitical tensions in West Asia and disruptions around the Strait of Hormuz, a key global oil transit route.

“The decision to increase the price of petrol and diesel by ₹3 a litre and CNG by ₹2 a kg indicates that the government is playing it safe through small increases, perhaps stage by stage, without triggering a sharp spike in cost-push inflation. This is a welcome step,” said VK Vijayakumar, Chief Investment Strategist at Geojit Investments.

According to industry estimates, state-run oil marketing companies are facing daily under-recoveries of nearly ₹1,000 crore with crude oil hovering around the $100-per-barrel mark. Analysts said the latest price hike is still significantly below what the Street had anticipated.

Domestic brokerage Emkay Global Financial Services estimated current under-recoveries at around ₹18-20 per litre on petrol and diesel at prevailing crude prices. The brokerage had expected an initial fuel price increase of nearly ₹10 per litre to partly offset losses without triggering a severe inflation shock.

Analysts caution that if crude prices remain elevated over the coming months, further rounds of fuel price hikes may become unavoidable. Emkay estimates cumulative increases could eventually reach ₹18-20 per litre over the next three to six months if global oil prices continue to stay above $100 per barrel.

According to brokerage estimates, a ₹10-per-litre increase in fuel prices could lift retail inflation by nearly 75 basis points once secondary effects such as transportation costs and higher input prices are factored in.