When the Strait of Hormuz effectively closed in late February 2026 following US-Israeli strikes on Iran, India's state-run fuel retailers—Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation—faced an existential threat. Nearly 90% of India's LPG imports pass through this critical chokepoint, and with domestic production meeting only about 40% of demand, the companies moved aggressively to secure supplies. They booked LPG imports amounting to 40,000 tons per day, driven by fears that cargoes wouldn't be delivered at all.
But the actual daily import requirement has now stabilized at 30,000-32,000 tons per day, creating an oversupply of 8,000-10,000 tons per day from contracted imports alone. This mismatch stems from a timing problem: when the interim US-Iran peace deal helped restart partial flows through the Strait for several weeks, all those panic-booked cargoes began arriving simultaneously. The market had already begun adjusting to lower demand levels, and while disruptions have since resumed, they haven't yet been felt in India.
The oversupply situation worsened because state processors didn't just book more imports—they also dramatically boosted domestic production. During the crisis, domestic LPG production increased by more than two-thirds to 54,000 tons per day after the government issued orders directing refineries to maximize LPG yields by diverting propane, butane, propylene, and butenes streams to the LPG pool.
Daily production has since been scaled back to about 40,000 tons per day, but this remains significantly higher than pre-crisis levels of around 35,000 tons per day. The combination of 40,000 tons per day domestic production plus 30,000-32,000 tons per day imports creates total supply of 70,000-72,000 tons per day—against June consumption of just 73,000 tons per day, compared with the 91,000 tons per day average in the year ended March 2026.
The most concerning aspect for the state-run retailers is that this isn't just a temporary dip—large industrial consumers have been slow to return to LPG. Restaurants, hotels, and ceramic-tile manufacturers switched to alternative fuels like piped natural gas during the supply crisis, and many show little inclination to switch back.
The numbers tell the story: non-domestic LPG sales plummeted by 48% in March 2026 compared to the previous year, while bulk LPG sales collapsed by 75.5%. These commercial and industrial segments traditionally represented higher-margin sales for the state-run retailers, so their permanent departure represents not just volume loss but margin erosion.
Several structural factors are driving this shift. The government has aggressively promoted PNG adoption through National PNG Drive 2.0, which has been extended until June 30, 2026. More than 80,400 consumers have voluntarily surrendered their LPG connections in favor of PNG. For commercial users, PNG offers compelling advantages: it's typically 20-30% cheaper per unit of heat than LPG, provides continuous 24×7 supply without cylinder delivery logistics, and eliminates storage constraints.
The oversupply situation is creating immediate financial pressures. At least one state refiner has already paid penalty charges to a shipowner after discharge of LPG cargo was delayed because storage tanks were full. These demurrage charges—fees imposed when cargo remains at port beyond the allotted free time—can escalate quickly. Rates typically increase over time to discourage prolonged delays, and they represent pure expense items that directly reduce operating margins.
Beyond demurrage, the excess LPG stocks create substantial inventory carrying costs. With LPG imports averaging 2 million tonnes per month pre-crisis, and current oversupply of 8,000-10,000 tons per day, the value of excess inventory represents significant working capital. Assuming an LPG import cost of approximately ₹50,000 per ton, this translates to ₹400-500 crore of blocked working capital, generating ₹32-45 crore annually in additional interest expenses at current rates.
The production scale-back from 54,000 tons to 40,000 tons per day—a 25.9% reduction—also impacts refinery economics. Refineries have substantial fixed costs that must be absorbed across production volumes. When production drops, labor costs, maintenance expenses, and overheads remain largely unchanged, leading to higher per-unit costs and reduced fixed cost absorption.
The LPG oversupply experience has exposed critical vulnerabilities in the risk management frameworks of India's state-run fuel retailers. The current situation represents what analysts describe as "a decade of deferred decisions—on reserves, on infrastructure, on supply diversification" that the Hormuz closure made impossible to ignore.
Going forward, these companies need to implement more sophisticated scenario-based planning systems that account for varying degrees of geopolitical disruption. Rather than panic booking at maximum volumes, they should develop staged procurement triggers with pre-defined escalation points based on disruption severity and duration.
The experience also highlights the need for better demand forecasting capabilities, particularly for industrial customers. The state-run retailers should develop segmented demand forecasting models that account for different recovery patterns across customer segments, monitor leading indicators of demand recovery, and implement adaptive supply response mechanisms that can quickly adjust production and procurement based on actual demand signals.
The permanent shift by some industrial users to piped gas represents a fundamental change in India's cooking fuel landscape. For Indian Oil Corporation, Bharat Petroleum Corporation, and Hindustan Petroleum Corporation, this means adapting to a new normal of structurally lower commercial and industrial LPG demand.
The government is actively encouraging this transition through policies that direct households to switch to piped gas where available or risk losing LPG supply. The long-term solution, according to policy experts, lies in reducing structural dependence on LPG itself through a transition towards a diversified cooking energy mix including piped natural gas, electric cooking, and bio-based fuels.
For the state-run retailers, this means portfolio diversification—greater focus on the domestic household segment, potential participation in the PNG growth story, and reduced exposure to commercial and industrial LPG. It also means right-sizing import contracts and domestic production to align with structurally lower demand levels, while investing in enhanced storage infrastructure to mitigate future supply chain disruptions.
The LPG oversupply crisis of 2026 may eventually be remembered as a turning point—not just for exposing the vulnerabilities in India's energy security framework, but for accelerating the transition toward a more diversified and resilient cooking fuel ecosystem.
