Oil prices rallied for the third straight day on Tuesday amid fears of supply constraints. The price hike received a mixed investor response on Dalal Street.

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Shares of upstream oil and gas companies like Oil and Natural Gas Corporation (ONGC), Oil India Corporation (OIC), GAIL, and Reliance rose up to 4 percent while Indian Oil Corporation (IOC), Gujarat Gas and Indraprastha Gas declined upto 1.3 percent.

The mixed trend in oil and gas stocks comes at a time when major producer United Arab Emirates has indicated that it has no spare capacity. This, when UAE and Saudi Arabia were being seen as the only two countries in the Organization of the Petroleum Exporting Countries (OPEC) with the capacity to make up for lost Russian supply and weak output from other member nations. Political unrest in Libya and Ecuador has also led to supply concerns.

The sectoral index Nifty O&G slipped 0.4 percent in intraday trade but rose 1.2 percent from that level making its way back into the green territory. Out of 15, seven scrips on Nifty O&G were in the green while eight were trading in red.

Oil, ONGC, Petronet LNG, Reliance, BPCL and Castrol India were among the gainers, having risen between 0.15 to 4 percent. IOC, IGL, Gujarat Gas, Gujarat State Petronet, Mahanagar Gas Limited, and Aegis Logistics gave up 0.2 to 1.3 percent.

Shortages in the market seem to have led to a rebound in oil prices this week countering recession jitters that weighed on prices over the previous two weeks, according to a Reuters report.

Gary Schlossberg, Global Strategist at Wells Fargo Investment Institute, is of the view that the current account deficit in India, rising commodity prices, higher cost of oil and the weakening rupee may push the Reserve Bak of India (RBI) to become a bit more aggressive.

Also Read: Sharekhan sees oil and gas stocks as good investment bets in a volatile market

Meanwhile, G7 leaders are discussing a potential price cap on Russian oil that would hit President Vladimir Putin's war chest while also lowering energy prices.

Brent crude oil price was above $116 a barrel amid expectations of further sanctions on Russian oil at the Group of Seven countries meet. This led to fears of further supply constraints.

Why O&G stocks react mixed to oil price rise

Any change in oil and gas prices significantly impacts the Indian stock market as it imports oil for more than 80 percent of its requirement. Therefore, higher brent means consumers will have to pay more for oil, meaning domestic oil prices are rising.

Higher crude oil prices boost oil explorers' average realisation from every barrel of the oil sold. The rise in the Singapore gross refining margin (GRM) to a record high also bodes well for Indian refiners as they process raw crude into refined products.

However, smaller companies like Indraprastha Gas and Mahanagar Gas are adversely affected because their sourcing costs go up.

ONGC also benefits from rise in natural gas prices globally because a significant share of revenue is generated through the sale of gas.

(With inputs from Reuters)