Growth prospects for oil marketing companies (OMCs) remain rocky amid the prolonged West Asia tension and Donald Trump’s recent call for sanctions against entities doing business with Iran. While the immediate market reaction was muted given that Iran exports only 0.5% of global oil output, the move adds to uncertainty in the oil market.
Still, with Brent crude oil prices down 12% from their highs in the June quarter (Q1FY27), OMCs—Indian Oil Corp. Ltd (IOC), Bharat Petroleum Corp. Ltd (BPCL), and Hindustan Petroleum Corp. Ltd (HPCL)—are expected to post strong Q2 results. Also, the International Energy Agency has projected a surplus in oil supplies in CY27, improving the medium-term outlook for OMCs.
Brent crude softened to about $72 per barrel in early July after the US and Iran signed a memorandum of understanding on 17 June. But with hostilities resuming, Brent now trades at over $90 per barrel.
While this is higher than the average of $69 per barrel in Q2FY26, it is notably lower than Q1’s peak of $105 per barrel. Also, the market remains adequately supplied, considering the special Strait of Hormuz permission given to Iraq and the increase in ship-to-ship transfer of crude oil, reducing the risk of abrupt market shortages.
Ship-to-ship transfer shifts risk from the shipping company to oil-producing nations. Besides, the drawdown in inventories by the US and China is helping to stabilize the market. India’s imports also improved to 5.1 million barrels per day (mbpd) in July, as per Petroleum Planning & Analysis Cell, up from 4.8 mbpd in June but marginally lower than 5.3 mbpd in February.
Improving margins
At current prices, integrated margins for IOC, BPCL and HPCL have improved to $11.7, $13.3 and $8.3 per barrel, respectively, as per a 25 August Nomura Global Markets Research report, brightening their outlook.
In contrast, Q1 figures were $7.3, $5.5 and negative $4.5 per barrel. Integrated margin includes refining plus marketing margin, LPG under-recoveries and windfall tax benefits.
“We believe OMCs offer the strongest earnings recovery within our coverage once Hormuz reopens, as lower crude and easing freight and insurance costs should support a swift recovery and likely compensate for Q1FY27 losses,” Antique Stock Broking said in a report on 26 August.
OMCs faced significant stress in Q1 with HPCL and BPCL reporting Ebitda losses of ₹16,100 crore and ₹4,100 crore, respectively, against profits of ₹7,600 crore and ₹9,700, a year ago.
HPCL suffered more as inadequate refining capacity led to market purchases at higher cost but expects to reduce third-party fuel purchases by end-FY27, helped by the ongoing expansion.
Aided by inventory gain on finished products, IOC reported an Ebitda of ₹1,950 crore, though it fell 85% year-on-year. IOC’s earnings could also get a boost from its refining capacity expansion slated to come online by December, amid a strong refining spread.
Refining margins are receiving support from lower throughput with several refineries damaged by the ongoing conflict, China’s exports curbs and the longer lead time required for refineries to scale up, even if crude prices stabilize at lower levels.
Shares of OMCs have declined 17-27% since the West Asia conflict began on 28 February. HPCL looks expensive at an enterprise value of 16.3 times FY27 estimated Ebitda, while IOC and BPCL trade at 7.4x and 10.4x, as per Bloomberg. The stocks will take further cues from geopolitical developments and how crude prices behave.