Oil Price Surge: Upstream Gains, Downstream Margins Under Pressure

The supply shock, stems from production cuts in Iraq, Saudi Arabia and Kuwait, along with shutdowns of major facilities in Qatar and Saudi Arabia, has significantly disrupted global oil supply chains. India, which imports a majority of its crude requirements and routes over half of it via the Strait of Hormuz, faces heightened vulnerability.

According to a sector update by HDFC Securities Institutional Research, oil marketing companies (OMCs) are expected to see pressure on integrated margins as retail fuel prices remain unchanged despite rising crude costs. While gross refining margins (GRMs) have improved sharply, supported by a spike in fuel cracks, this benefit is likely to be offset by compression in marketing margins.

"While Indian refiners face the challenge of meeting the country's crude oil requirement amidst limited crude oil availability and sky rocketing transportation costs, city gas distribution companies are forced to deal with reduction in gas availability, high gas prices, and a depreciating rupee against the dollar," noted the report

The report notes that for every Rs 1 per litre decline in marketing margins, earnings per share (EPS) for major OMCs could fall by 20-24%. Among them, Indian Oil Corporation is relatively better placed due to a lower dependence on marketing margins compared to peers.

Singapore GRMs have nearly doubled in early March compared to February averages, supported by a steep rise in gasoline and diesel cracks. Inventory gains from higher crude prices may offer some near-term support to reported earnings in the fourth quarter of FY26.

In contrast, upstream oil producers are poised to benefit from elevated crude prices and a weaker rupee. Higher realizations for oil and gas are expected to boost profitability, provided there is no adverse government intervention through additional taxes.

"The upstream segment seems to be the only beneficiary as higher crude oil prices and weakening rupee should improve the oil and oil-linked gas realization of this segment." the report notes.

For every USD 5 per barrel increase in crude prices above USD 70, earnings of upstream firms are projected to rise meaningfully. Among them, Oil India is preferred over ONGC due to stronger production growth outlook.

Despite the evolving global scenario, the report maintained their existing estimates and recommendations across both upstream and downstream segments, citing uncertainty around the duration and intensity of the disruptions.

The current oil shock presents a divergent impact across the sector, benefiting upstream producers while squeezing downstream marketing margins, highlighting the importance of segmental exposure in navigating the volatile energy landscape.

- ANI