Barring a few macro risks, oil marketing firms seem to be in a sweet spot

China today has the largest refining capacity globally, with its refining capacity to reach 21 million barrels per day (mb/d) in 2025

Global refining dynamics look favourable for Indian refiners and oil marketing companies (OMCs), given the tight inventories, and renewed demand in the European Union.

 

China’s desire to consolidate its refining sector by shutting smaller capacities and upgrading outdated refineries has also led to short-term supply tightness.

 

Meanwhile, crude oil and gas prices are flat and Indian refiners are continuing to source Russian supply at a discount to Brent.

 

Hence, OMCs in the July-September quarter (Q2) of FY26, could pick up high gross refining margins (GRMs), and appear to be comfortably surpassing the benchmark Singapore GRM of $4.1 per barrel. 

Chennai Petroleum, Mangalore Refinery & Petrochemicals (MRPL), Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL), Indian Oil (IOC) and Reliance Industries (RIL) could all gain from higher GRMs.

 

China today has the largest refining capacity globally, with its refining capacity set to reach 21 million barrels per day (mb/d) in 2025. In 2023, the utilisation peaked near 88 per cent. Chinese refineries ran at only 75 per cent of their capacity in 2024.

 

New mega plants and petchem-integrated complexes are coming online. But the short-midterm implications of Chinese upgrades will be tighter supplies.

 

Russian discounts, which briefly compressed to $1.5 per barrel in the April-June quarter (Q1), have widened back to $2–3 per barrel even as Brent drops below $67 per barrel.

 

Indian refiners are thus in a sweet spot with outages in Europe, and lean global inventories.

 

For India, every $1 per barrel upmove in cracks translates into a swing of between $0.1 and $0.5 per barrel. There’s a GRM premium of $7.3-7.5 per barrel over the Singapore benchmark.

 

Chennai Petrochemicals is a pure refinery (not an OMC) with modern facilities, and could provide higher returns and dividends since it can maximise diesel and aviation turbine fuel (ATF) production.

 

It has a high GRM sensitivity with every $1 per barrel GRM rise, boosting earnings per share (EPS) by ₹38 and earnings before interest, taxes, depreciation and amortisation (Ebitda) by around ₹750 crore.

 

MRPL also stands to benefit since it sources over 30 per cent of its crude from Russia at a discount.

 

For every $1 per barrel GRM increase, the EPS increases by ₹4. High cash flow would help deleverage the balance sheet – the total debt is ₹13,500 crore, of which ₹7,500 crore is working capital.

 

For the OMCs, marketing margins are strong, and LPG losses have reduced. Lower oil prices are supportive of strong auto fuel marketing margins (currently at ₹5-9 per litre).

 

Falling LPG prices have led to 30-40 per cent reduction in losses per cylinder in Q2FY26 versus Q1FY26.

 

More details are awaited on compensation of ₹30,000 crore for LPG under-recoveries by the government but this is clearly an upside.

 

 

The OMCs have already booked inventory losses in Q1FY26, and further inventory losses are unlikely given the stable Brent prices while the working capital requirement has reduced.

 

The Q1FY26 earnings were lower than estimates due to inventory losses.

 

On a sequential basis for Q1FY26 over Q4FY25, profit after tax (PAT) increased 30 per cent for HPCL and 90 per cent for BPCL while it was lower by 20 per cent for IOC due to inventory impact.

 

The Russian crude mix varies for the three OMCs but all three have significant Russia exposure.

 

LPG losses decreased to ₹8,000 crore in Q1FY26 (versus ₹12,000 crore in Q4FY25) and marketing margins rose.

 

Given the geopolitical risks, OMCs are unlikely to reduce retail prices unless the government intervenes and asks them to cut pump prices. Hence, this scenario warrants earnings upgrades for all three OMCs.

 

One generic risk is rupee depreciation as the crude oil liabilities and borrowings are generally unhedged.

 

Another risk common to all three OMCs is large long-gestation capex plans which are currently on the table.

 

Delays in receipt of kerosene and LPG-related compensations and subsidies would result in higher working capital.

 

For HPCL, the downside risks could be lower-than-expected GRM and marketing volumes and it has embarked on a $6-7 billion refinery modernisation plan, which has execution risks.

 

IOC could have risks related to delay in ramp-up of capacity at the company’s Paradip refinery to reach optimal operational capacity.

 

BPCL also has large capex plans.