The Oil and Gas space has remained particularly strong not only over the past twelve months but also on a YTD basis. This group, represented by the Nifty Oil and Gas Index, has surged 58.98% over the past one year. The broad market index Nifty 500, during the same time period, gained 38.11%. This relative outperformance has also been carried forward on a YTD basis. When inspected on a Year-to-Date note, the Nifty Oil and Gas space has relatively outperformed by gaining 25.27% against the Nifty 500 gaining 10.35% over the same period.

This sector is significantly influenced by a complex interplay of macroeconomic factors, geopolitical tensions, and domestic policies. In recent years, the sector’s volatility has increased markedly, reflecting the rapid changes and disruptions on the global stage.

The ongoing geopolitical tensions between Russia and Ukraine, which have persisted for over two years, have led to market adjustments that have gradually been priced in. However, the recent Israel-Hamas conflict, which erupted six months ago, has also caused a sudden spike in oil and gas prices, illustrating how new conflicts can quickly impact the sector.

This heightened volatility is evident in the performance of the Nifty Oil & Gas index. In mid-October, the index was at 7500 levels. As geopolitical tensions escalated, particularly with the intensification of the Israel-Hamas conflict, a significant trend change occurred. By the end of October last year, the index had surpassed both the 50-week and 100-week moving averages, signalling a major shift in trend.

A look at the daily chart presents an optimistic picture. The sector is showing strong improvement in its Relative Momentum against the broader markets and is set to roll inside the improving quadrant of the Relative Rotation Graph (RRG) when benchmarked against the broader Nifty 500 Index.

Technically speaking, looking at the weekly charts, it appears that the Nifty Oil & Gas index was at Rs. 7500 levels in the middle of October. As the geopolitical tensions began and the Israel-Hamas war intensified, this index saw a change in trend. On a weekly chart, it can be observed that by the end of October last year, the index crossed above the 50-week and 100-week MAs, confirming the change in trend. In December last year, the index price broke out from its previous high as well as from the long consolidation at 8650 levels which triggered a steep upmove for the next couple of months. After gaining nearly 38% and forming a high of 12000 in February this year, the index took a breather.

Since then, Nifty Oil & gas has been moving in a range of 10800-12000 levels. Last week, the index made a strong closing for the week. It has seen an all-time high on a weekly closing basis. Along with achieving a strong closing, it is very close to its recent highs of 12,000. A breakout from this resistance level can trigger the continuation of further upmove.

Technical indicators support this bullish outlook. The Relative Strength Index (RSI) is entering the overbought zone, indicating further potential for upward movement.
Additionally, the price is well-positioned in the upper band of the Bollinger Bands, highlighting the likelihood of continued momentum.

In conclusion, the oil and gas sector’s performance is heavily influenced by global geopolitical dynamics and domestic policies. The recent fluctuations in the Nifty Oil & Gas index underscore the sector’s sensitivity to external shocks and the importance of technical analysis in identifying potential trends. As the sector navigates these challenges, it presents both risks and opportunities for investors.

Which Stocks Should I be Looking At?

The Nifty Oil and Gas Index is formed by a total of 15 constituents which has RELIANCE, ONGC, IOC, BPCL, and GAIL as its top 5 constituents. However, a closer look reveals that just RELIANCE and ONGC combined make 48.31% of the Index.

A weekly close above the 12000 mark could open up fresh buying opportunities in specific stocks within the sector. As mentioned above, for any Index to have a sustainable move on the upside, the participation of at least a third of its constituents including the top 5 becomes imperative. Investors holding stocks in this sector might continue to see gains, with a long-term target of 13300 levels.

– Foram Chheda, CMT