State-run oil marketing companies are experiencing an unprecedented earnings crisis as the Middle East conflict drives up crude procurement and shipping costs. According to a Jefferies report titled 'Energy Market Letter: Volume XXII', OMCs are losing ₹26 per litre on petrol and ₹30 per litre on diesel based on 15-day average prices. The cost of procuring crude for Indian OMCs has reached ₹125 per barrel, creating a widening gap between what fuel retailers spend on crude and what they recover through domestic fuel sales. As reported by The Times of India, this represents a significant escalation from previous under-recovery levels, with the problem stemming from crude rising far faster than pump prices, with the Indian crude basket hitting $123 per barrel against an average of about $66 in 2025-26, while domestic petrol and diesel prices remained unchanged.
A major factor behind the squeeze is the surge in freight costs, which have risen eightfold since the conflict began. According to Jefferies, shipping now makes up more than a quarter of the landed cost of crude oil, against just 3% before the war. The pressure has been compounded by fresh disruptions to crude shipments from the Middle East. Jefferies reported that freight rates had climbed another 8% over the past week, adding to the cost of bringing oil into India. This dramatic increase in shipping costs is creating additional pressure on OMCs beyond the already elevated crude prices, making fuel retailing increasingly unviable for state-run companies.
With global crude oil prices exceeding $105 per barrel, the refining sector is experiencing significant benefits while other oil companies face challenges. According to WealthMills Securities' director for equity strategy Kranthi Bathini, as reported by NDTV Profit, the refining industry is in a 'sweet spot' while exploration companies have limited space for growth. This dynamic is creating a clear divergence in performance across different segments of the oil and gas sector, with refiners earning strong margins from the spread between crude and fuel prices. Reliance Industries remains a preferred largecap bet due to improving refining margins, retail growth, and the expected Jio IPO, according to Mayuresh Joshi of Marketsmith India.
The divergent performance across oil stocks was evident in Monday's trading session, with mixed results reflecting the sector's challenges. According to NDTV Profit, the Sensex fell 548 points to 71,924.68 and the Nifty closed at 22,363.35, down 0.7%, even as the Nifty Smallcap 100 rose 1.42%. Hindustan Petroleum gained more than 2% intraday after the RBI's dollar window for state-run oil companies took effect, while Reliance Industries touched a fresh 52-week low. The RBI's dollar window, which analysts estimate moves $11-12 billion of monthly dollar demand away from the spot market, provides some currency relief but does not address the gap between crude costs and pump prices that continues to pressure OMCs.
Pure-play refiners are demonstrating exceptional performance amid the high crude environment. Chennai Petroleum (CPCL) has gained about 86% over the past year and 33% in the last three months, making it one of the biggest winners in the oil complex. Mangalore Refinery (MRPL) has risen about 18% over the year and 15% over three months. Singapore gross refining margins have stayed above $10 per barrel since the West Asia crisis began, as per ICRA, supporting strong margins for refiners. However, even refiners face limits, with the government levying a special additional excise duty on diesel exports, which was cut to ₹16 per litre from ₹20 from October 1. Reliance Industries is expected to benefit further from improving gross refining margins, with the refining business potentially turning in favor of the company. Despite the pressure on OMC marketing margins, Choice Institutional Equities identifies CPCL as the top pick with a target price of ₹1,885 per share and assigns MRPL a target price of ₹215 per share.
