Investing.com -- Jefferies said peace in the Middle East should gradually normalize energy prices, creating better conditions for Indian oil marketing companies.

Marketing losses on petrol and diesel at Spot Brent have narrowed to Rs (-) 2 per liter and Rs (-) 11 per liter. The firm said marketing margins at Spot Brent will rise above normal levels assuming standard gross refining margins. This may lead to some increase in excise duties that were lowered in March.

BPCL and IOCL shares are down 19% and 23% respectively since the start of the conflict. Jefferies said these stocks offer strong risk-reward opportunities.

Singapore gross refining margins remain at $18 per barrel, up four times compared to late February. Gasoline, diesel and aviation fuel cracks are $32, $41 and $44 per barrel currently. About 3.4 million barrels per day of refining capacity has been damaged since the start of the Middle East conflict, representing 3.5% of global refining capacity.

Brent crude has corrected to $83 per barrel, while gasoline and diesel cracks remain elevated due to higher freight costs that are about double the levels from late February.

The firm said marketing margins could turn positive at current crude prices once refining normalizes. Assuming petrol and diesel cracks of $20 per barrel, normalized freight rates and Brent at $83 per barrel, petrol and diesel margins would be Rs +5 and Rs +8 per liter.

The government lowered excise duty on petrol and diesel by Rs 10 per liter at the end of March. Jefferies said the government could raise excise duty to partially offset the earlier reduction once marketing margins move above normal levels of Rs 3.5-4 per liter.

HPCL is down only 8% since the start of the conflict. BPCL is trading at a lower valuation versus HPCL on price-to-book, unlike in the past decade where it traded at a premium. BPCL has a full-cycle return on equity of 25%, ahead of HPCL's 16.5%. IOCL's valuation is nearly one standard deviation below its long-term average.

Jefferies maintains a Buy rating on BPCL with 37% potential upside and on IOCL with 24% potential upside.