Brent crude has slipped below $75 per barrel, creating a favorable environment for India's state-run oil marketing companies as marketing losses are narrowing significantly. According to Jefferies, oil marketing companies are currently breaking even on petrol sales, with losses on diesel reduced considerably compared with previous weeks. JPMorgan reports that composite margins on petrol and diesel sales at state-run refiners and fuel retailers are now above levels seen before the recent West Asia conflict, with gains driven by lower crude prices and reduced central excise duties. Singapore Gross Refining Margins are currently around $14 per barrel compared with roughly $5 per barrel before the conflict began, as reported by Jefferies. The improvement comes after the conflict in the Middle East had pushed global oil prices higher, while retail fuel prices in India remained largely unchanged for much of the period and increased only partially despite rising costs.
Kotak Institutional Equities and JPMorgan have both turned more constructive on India's state-run oil marketing companies, with Kotak upgrading BPCL, HPCL and IOCL from 'Sell' to 'Reduce' ratings. As reported by NDTV Profit, the brokerages argue that sharp correction in oil prices has eased pressure on profitability for Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd. JPMorgan has identified BPCL and IOCL as preferred picks, while Kotak expects the sector's fortunes to improve further if oil prices continue to ease. Jefferies specifically highlights that BPCL and IOCL are beneficiaries of lower crude and elevated GRMs, with the brokerage noting that refining margins remain elevated despite some weekly decline. The improvement comes after Brent crude prices fell more than 30% from recent peaks as fears of prolonged Middle East disruptions eased and expectations grew around a potential US-Iran agreement.
Kotak Institutional Equities has set target prices of ₹150 per share for IOC, ₹400 for HPCL, and ₹320 for BPCL. According to Moneycontrol, among the major OMCs, HPCL shares closed at ₹392.75 on Friday and have remained largely flat over the past year. BPCL ended at ₹306.90 and is down around 2 percent over the same period, while IOC settled at ₹143.58 and has gained about 3 percent. In comparison, the Nifty 50 has declined nearly 4 percent over the last year, highlighting the outperformance of OMC stocks despite recent challenges. Jefferies notes that the combination of lower crude prices and still-elevated refining margins currently creates a favorable setup for oil marketing companies such as BPCL and IOC.
Jefferies reports that refining margins decline week-on-week but still remain elevated, with disruptions to refining infrastructure in the Middle East having reduced global refining capacity. As a result, supplies of products such as gasoline, diesel and aviation fuel remain relatively tight, with supply-chain normalisation may take time, which could continue supporting stronger refining economics during the first half of FY27. The brokerage notes that petrochemical margins have improved significantly, with petrochemical margins up 135% since the start of the conflict, partly attributed to disruptions at major petrochemical facilities in Iran and Saudi Arabia. JPMorgan expects OMCs could report strong earnings in the December and March quarters if crude prices remain subdued, though visibility on fuel marketing margins beyond fiscal 2028 remains limited.
While the outlook remains positive, Jefferies identifies key risks including shipping costs remaining elevated and India's dependence on Russian crude imports with the expiry of the United States waiver remaining a development worth monitoring. The government had reduced excise duty on petrol and diesel by ₹10 per litre each in March to cushion consumers from rising fuel costs, with duties potentially restored once global oil prices fall to pre-war levels. JPMorgan identifies OMCs will have acquired material debt during the last few months affecting valuations, and a major part of the restoration of profitability is on account of the reduction in excise duties. However, Jefferies believes that the combination of lower crude prices and still-elevated refining margins currently creates a favorable setup for continued OMC recovery, with investors likely to track the direction of crude oil prices, refining margins and fuel marketing profitability as key variables.
