Shares of energy companies fell sharply in early trade on Wednesday after international crude oil prices tumbled nearly 10% in overnight trade, with the U.S. West Texas Intermediate (WTI) crude falling below $100 a barrel. The sector, already reeling under stress due to recent imposition of new taxes on domestic crude oil production, faces a double whammy of global economic recession and lockdowns in China which could dent demand. The sell-off was further triggered by a report by Citigroup that pegged crude oil to collapse to $65 a barrel by the end of this year and slump to $45 by end-2023, if a demand-crippling recession hits.

The S&P BSE Energy dropped as much as 1.2% in the first hour of trade on Wednesday, with shares of Chennai Petroleum Corporation Limited (CPCL) and Mangalore Refinery & Petrochemicals (MRPL) falling up to 10%. The index heavyweights Oil and Natural Gas Corporation (ONGC), Oil India Corporation (OIL), Indian Oil Corporation (IOC), Reliance Industries (RIL), Gujarat Gas, and Indraprastha Gas dropped in the range of 1%-5%.

In contrast, the BSE benchmark Sensex was trading 60 points higher at 53,393 levels, led by gains in bank and auto stocks such as Mahindra & Mahindra, Maruti Suzuki India, Kotak Mahindra Bank, State Bank of India, and Axis Bank.

The sell-off in oil and gas stocks were spooked after the price of Brent and U.S. crude nosedived nearly 10% in overnight trade amid concerns about global recession and fresh Covid-19 lockdowns in China, one of the world’s largest oil consumers. The looming fear of recession undermines supply shortage concerns amid a strike by Norwegian oil and gas workers. The Brent crude futures dived 9.5% and the US West Texas Intermediate (WTI) crude slipped 8.2%, registering their biggest daily percentage loss since March 9, 2022.

Meanwhile, in Asian trading hours, the Brent oil for September delivery were up 1.7% at $104.5 per barrel, while the U.S. West Texas Intermediate (WTI) crude August futures rose 1.35% to $100.9 a barrel. The supply outages in Libya and shutdowns in Norway due to strike by oil and gas workers provided some support to oil prices on the lower side. The sentiment also got a lift after Saudi Arabia, the world's top oil exporter, raised August crude oil prices for Asian buyers to near record levels amid tight supply.

WTI oil prices have corrected almost 7% last month as investors weighed the risk that rising interest rates could trigger a recession and dampen fuel demand. Further, oil prices slipped as the U.S. President Biden-led administration called for a three-month suspension of the federal gasoline tax to combat record prices.

Analyst at ICICI Direct Research expect WTI crude oil price to face resistance at $115 per barrel. “As long as it sustains below this level, it is likely to get dragged down towards $95/barrel for this month,” it says in a report dated July 4.

The energy stocks have been witnessing aggressive selling since last Friday after the government imposed cess of ₹23,250 per tonne by way of special additional excise duty (SAED) on domestic crude oil production. The Centre also levied a special additional excise duty of ₹6 per litre on exports of petrol, ₹13 per litre on exports of diesel, and ₹6 per litre on exports of aviation turbine fuel (ATF) to ease pressure on the current account deficit in the backdrop of the rising imports bill. The government, however, has said there would be no impact of export tax on domestic fuel prices.

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