Oil prices surge: Indian OMC margins under pressure amid supply risks

Shares of oil marketing companies in India are likely to come under pressure again when the market opens on Friday, as oil prices rose after concerns about supply disruptions from the Middle East gained momentum once again.

Shares of Hindustan Petroleum Corporation Ltd (HPCL), Bharat Petroleum Corporation Ltd (BPCL) and Indian Oil Corporation Ltd (IOC) had gained up to 2% on Wednesday when Brent and West Texas Intermediate prices tumbled.

Rising oil prices typically put pressure on downstream stocks because their input costs increase significantly.

Since these companies often have limited ability to pass these costs on, usually due to regulated pricing, their margins are squeezed.

They purchase crude at higher prices for refining and then sell the finished products, but if the prices of the end products do not rise proportionally with the cost of crude, a full cost pass-through to consumers is restricted.

Oil prices rise again

Iran's foreign minister stated on Wednesday that while Tehran is still reviewing a US proposal aimed at ending the war, the nation has no intention of engaging in talks to resolve the Middle East conflict.

The comments by Iran’s foreign minister sparked a rally on Thursday in Brent and West Texas Intermediate crude prices after the benchmarks had fallen sharply in the previous session.

The price of Brent was last at $104.13 per barrel, up 1.9%, while WTI was up 2% at $92.10 per barrel.

Both benchmarks had slumped more than 4% at one point on Wednesday, which aided the OMC stocks.

White House press secretary Karoline Leavitt stated that US President Donald Trump would intensify pressure on Iran if Tehran does not concede that it has been "defeated militarily."

According to reports, the 15-point proposal presented by Trump via Pakistan outlines several demands for Iran.

These include the removal of its highly enriched uranium stockpiles, a complete stop to enrichment activities, restrictions on its ballistic missile program, and the cessation of funding for its regional allies.

The conflict has led to a near-total cessation of shipments through the Strait of Hormuz, a critical chokepoint that normally accounts for approximately 20% of the global crude oil and liquefied natural gas supply.

This disruption has been labeled by the International Energy Agency as the most significant oil supply interruption in history.

OMC stocks remain under pressure

Mounting uncertainty stemming from rising crude oil prices in the US, Israel-Iran conflict led international brokerage firm UBS to downgrade three OMC stocks earlier this month.

UBS revised its target prices for the counters: IOCL's target was lowered to INR 175  from INR 190, BPCL's to INR 365 from INR 425, and HPCL's to INR 340 from INR 540.

According to UBS analysts, the current rise in crude prices and escalating geopolitical tensions are creating uncertainty for the earnings of Indian state-owned oil marketing companies.

This situation is reminiscent of the oil market disruption experienced in 2022.

Oil companies that rely heavily on fuel marketing face challenges when refining becomes more profitable than marketing.

This is evident in the substantial cuts to marketing margin estimates, which have been reduced by 43-45% for the financial year 2026-2027 (April-March) and 22-26% for FY28.

Market-wise, oil refiners, downstream firms, and gas companies are anticipated to be the most affected.

According to Elara Securities, the financial cushion significantly diminishes when oil prices exceed $110 per barrel.

Elara Securities recently noted that oil marketing companies (OMCs) like HPCL, BPCL, and Indian Oil face the greatest vulnerability.

While higher gross refining margins (GRMs) could provide some mitigation, they are unlikely to fully compensate for the impact of diminished retail margins and increasing losses on LPG.

The analysis indicated that with Brent crude at approximately $100 per barrel, OMCs' earnings could plummet severely—by 90% to 190%—unless measures such as a fuel price increase, tax reductions, or enhanced LPG subsidies are implemented.