OMCs may see rerating as crude stays soft, GRMs strong and LPG losses ease

The next few quarters could favour downstream refiners and marketers over upstream, with Brent expected to stay in a $60-65 range or drift lower, while GRMs remain strong and LPG under-recoveries ease

The global oil & gas scenario suggests that the next few quarters could see downstream refiners and marketers (oil marketing companies, or OMCs) outperform upstream. Crude oil is expected to remain flat or trend downwards from the current range of Brent $60-65/barrel (bbl). Meanwhile, gross refining margins (GRMs) remain strong and OMCs have healthy marketing margins, and may enjoy sharp decline in LPG (liquefied petroleum gas) under-recoveries.

 

Managements across OMCs seem positive on volume growth, GRM outlook, and capex executions. Hence, BPCL, HPCL, and IOC could all see upgrades unless some geopolitical factor leads to a sharp upswing in crude oil prices. IOC has high exposure to petchem downstream, and that segment could be under pressure given global oversupply. 

The global economy is growing slowly, which means muted demand for oil & gas and production is in surplus. Supply is expected to grow as Opec-plus and non-Opec producers intend to ramp up production. 

OMC performance has been driven by strong GRMs. A revenue growth of 1.5-2 per cent year-on-year (Y-o-Y) may translate into an operating profit growth of over 200 per cent Y-o-Y. The average GRM of the three public sector OMCs increased to $10.0/bbl in the third quarter of 2025-26 (Q3FY26) to date from $3.1 in Q2FY26, due to lower crude oil prices and stronger product cracks on petrol and diesel. 

However, robust GRMs are offset to an extent by softening retail margins in November 2025, with strong diesel spreads cutting into retail margins. But analysts reckon there will be $3-4/bbl quarter-on-quarter (Q-o-Q) rise in GRM and a reduction in LPG losses to ₹2,500 crore per quarter, which will provide a boost.

 

The margin mix between refining and marketing is often inversely correlated. In Q3FY26, strength in petrol and diesel spreads, and unchanged retail prices of fuels pushed down diesel retail margins. Blended retail margins of about ₹3.6/litre (Q3FY26 to date) are 30 per cent lower Q-o-Q. But GRMs for the three OMCs are likely to be $12-13/bbl, which is $3-4/bbl higher Q-o-Q for Q3FY26. Hence, integrated margins for the second half of 2025-26 (H2FY26) may show some improvement over H1FY26 or stay in the same range.

 

The LPG loss for Q2FY26 at ₹4,470 crore was down ₹3,470 crore Q-o-Q and down ₹3,400 crore Y-o-Y, due to lower LPG prices ($526/tonne in Q2, down 10 per cent Y-o-Y). Commodity analysts project further price drops, with futures implying average prices of $483/tonne in H2FY26.

 

LPG under-recovery by late November was ₹17/cylinder while Q3FY26 average under-recovery was ₹40 down from ₹101 in Q2FY26. Hence, LPG losses for FY26 may top out at under ₹16,000 crore, well below the ₹40,000 crore losses in FY25. The release of ₹30,000 crore compensation will reflect partly in FY26 after five months of equal payments.

 

The expansion in refining capacity across all three OMCs means that the refining to marketing mix will move up to 86 per cent in FY28 from 82 per cent in FY25. This will hedge margin volatility in refining or marketing.

 

The leverage of the OMCs is comfortable and valuations are moderate. All three OMCs have strong balance sheets, with net debt-to-equity ratios such that they could absorb the aggregated ₹40,000 crore of LPG losses without stress while pushing through aggregated capex of ₹58,800 crore and maintaining a combined dividend payout of ₹18,440 crore. Net leverage should not rise much in the next two-three years, and dividend payout is likely to be maintained at yields of 3.5-4 per cent.

 

Assuming geopolitics doesn’t trigger supply risks, investors will have to consider scenarios where further reductions in crude oil and gas prices occur. Valuations are in moderate range if we factor in volume expansions, and the Street may not have fully factored in the most likely scenarios.

 

The weaker rupee, however, is a concern since this directly hurts OMCs with 4-5 per cent operating profit drop for every 1 per cent depreciation in rupee vs the dollar. Seasonal spike in gas demand for heating is also a factor, which may impact LNG (liquefied natural gas) costs. But OMCs will most likely continue to see benign crude oil prices and strong GRMs, and there could be significant re-ratings.