Petrol, Diesel Margins Back Above Pre-West Asia Conflict Levels: Report

Profitability at state-run oil marketing companies is expected to improve as softer crude oil prices support fuel marketing margins, although rising debt and uncertainty around fuel taxation could weigh on the sector’s longer-term outlook, according to a JP Morgan report, news agency PTI reported.

Composite margins on petrol and diesel sales for public-sector refiners and retailers have moved above levels seen before the recent West Asia conflict. The improvement has been driven by a decline in crude prices alongside reductions in central excise duties.

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Global oil prices had surged at the onset of the conflict, but retail fuel prices in India remained largely stable, increasing only marginally despite the gap with underlying costs. Even after a ₹7.50 per litre hike in May, pump prices continued to trail cost levels.

"Our estimates for OMC composite margins on petrol and diesel are now higher than pre-war levels. Losses on LPG are still elevated, but should also start to track oil down soon," JP Morgan said, adding that earnings for the April–June quarter are likely to be affected by significant inventory losses, while profitability in the second quarter could improve.

"Two issues limit our excitement around this improvement in margins: the OMC 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," it said. "It is possible that the government keeps taxes low for some time - permitting debt repayment at the OMC. The risk of an eventual increase in excise duties remains."

The government had reduced excise duty on petrol and diesel by ₹10 per litre each in March to avoid an immediate pass-through of higher global prices. These duties may be reinstated once crude prices stabilise at lower levels.

Among the three state-run companies, Bharat Petroleum Corporation Limited, Indian Oil Corporation and Hindustan Petroleum Corporation Limited, BPCL and IOC are seen benefiting more in the near term if crude prices continue to ease.

The brokerage noted that current petrol and diesel margins for BPCL and IOC are above pre-conflict levels, while HPCL’s margins have broadly recovered to or exceeded earlier levels. This reflects improved combined refining and marketing economics, even though standalone marketing margins remain below historical averages.

A sustained period of crude prices below $80 per barrel, along with firm refining margins, could support earnings from the second quarter onwards. However, the first quarter is expected to remain under pressure due to inventory losses linked to falling crude prices.

Borrowings across the three companies are also expected to remain elevated after absorbing losses on petrol, diesel and LPG sales in recent months. Losses on LPG, while still significant, are likely to ease as lower crude prices begin to feed through.