Israel-Iran ceasefire takes the pressure off crude prices, but not Indian OMCs

Yet, with tensions still prevailing in the region, state-run Indian oil marketing companies (OMCs) remain vulnerable to the adverse impact of volatile oil prices on their earnings.

However, the bigger concern related to the risk of the closure of the Strait of Hormuz appears to have waned now. While India does not buy oil from Iran, Hormuz is crucial because almost 40% of India’s oil imports in 2024 passed through this waterway.

The oil market remains subdued, with adequate supplies. Demand growth was 0.8% in 2024 and is expected to grow at the same rate in 2025, according to the International Energy Agency.

Production by the Organization of Petroleum Exporting Countries and other associate countries (OPEC+), forming a cartel, stood at 36.7 million barrels per day (mb/d) in May. This was lower than their target of 39.5 mb/d, last reached in October 2022.

OPEC+ has a surplus capacity of about 6 mb/d and has been unable to increase output as planned in the face of the sharp price decline.

Also Read | Israel-Iran conflict: How will rising crude oil prices affect India?

“We do not expect oil prices to remain elevated for long and maintain our oil price assumption of $70 per barrel for FY26/FY27 and long-term," Kotak Institutional Equities said in a 20 June report.

Kotak anticipates higher production from the US if prices stay above $70 per barrel, helping balance the market.

The marketing margin of domestic OMCs remained high in the first two months of FY26, when oil prices averaged $67 and $63 per barrel in April and May, leading to a clamour for a retail price cut.

While the current volatility will affect their near-term margins, it reduces the pressure on them to lower retail prices. Retail sales contribute about 85% of their volumes and a price cut could cause a bigger dent in their profits.

Favourable market dynamics

ICICI Securities projected in a 16 June report that the FY26 earnings per share (EPS) of OMCs would decline by 36-57% if retail prices were cut by ₹2 per litre. This is significantly higher than the impact of a decline in the gross refining margin (GRM), which would reduce their EPS by 10-18% for each dollar of decline.

Also Read | India concerned about crude oil supply disruptions in Strait of Hormuz as prices surge after Israel's attacks on Iran

OMCs had a strong Q4 in FY25 amid favourable market dynamics, with their aggregate Ebitda reaching ₹27,200 crore, up 11% year-on-year, compared with a sharp drop of 58% during 9MFY25.

Indian Oil Corp. Ltd (IOC) and Hindustan Petroleum Corp. Ltd (HPCL) reported an Ebitda growth of 30% and 20%, respectively. While Bharat Petroleum Corp. Ltd’s (BPCL) Ebitda declined by 16% on a high base, it was better than the 49% decline in 9MFY25.

BPCL’s GRM stood at $9.2 per barrel in Q4, sharply lower than $14.2 a year earlier. IOC’s Q4 GRM was slightly lower year-on-year at $7.9 a barrel, while HPCL’s GRM of $8.4 was higher than $6.95 a year ago. Kotak projected IOC, HPCL and BPCL GRMs at $7 per barrel each in FY26 versus $4.8, $5.8 and $6.8, respectively in FY25.

Also Read | Why refining margins stayed subdued in FY25. Hint: Shrinking Russian discounts

OMC share prices, which faced pressure since the flare-up began, gained about 3% on Tuesday. Amid the improving outlook, the stocks are up in the range of 30-41% from their 52-week lows at the end of February/early-March.

A lasting resolution of the West Asia conflict and a price retracement may trigger further investor interest in these stocks. Still, the lack of pricing power continues to be a key concern for OMCs.