India’s latest oil shock is creating sharply divergent fortunes within the downstream sector: refiners are benefiting from strong product cracks and healthy export realisations, while oil marketing companies (OMCs) are absorbing mounting losses on domestic petrol, diesel and LPG sales.
Singapore gross refining margins (GRMs) have remained above $10 per barrel since the onset of the West Asia crisis, supported by refinery outages, product supply disruptions and inventory drawdowns. Gasoline cracks remain elevated, while gasoil cracks have risen to exceptionally high levels amid tight supplies and aviation turbine fuel (ATF) cracks remain strong.
Yet on the marketing side, ICRA estimates OMC margins at negative Rs 8 per litre on petrol and negative Rs 9 per litre on diesel. Domestic LPG under-recoveries stood at around Rs 300 per cylinder in September 2026. Together, these losses are costing OMCs an estimated Rs 530 crore a day.
The divergence has emerged as crude prices surged while domestic retail fuel prices remained unchanged. The Indian crude basket climbed to $117.4 per barrel as of September 21, 2026, compared with an average of around $66 per barrel in 2025-26.
“The escalation of the West Asian conflict and disruptions to key oil supply routes have led to a spike in crude prices in recent weeks, resulting in sizeable marketing losses and LPG under-recoveries for oil marketing companies (OMCs),” said Prashant Vasisht, Senior Vice-President and Co-Group Head, Corporate Sector Ratings, ICRA.
The renewed US-Iran conflict, shutdown of Saudi Arabia’s East-West pipeline and heightened Houthi activity in the Red Sea have contributed to the surge in crude prices and tightening of product markets.
Strong Cracks Boost Refining Economics
For refiners, the same supply disruptions pushing crude higher have strengthened margins on petroleum products. Singapore GRMs have stayed above $10 per barrel since the West Asia crisis began. Refinery and product supply disruptions across West Asia, inventory drawdowns and damage to Russian refineries have tightened the availability of petroleum products.
ICRA’s analysis showed gasoline cracks remaining elevated, while gasoil cracks are exceptionally high relative to historical levels. ATF cracks have also remained strong amid constrained middle-distillate availability.
This has allowed refiners to obtain healthy realisations from exports even as the economics of selling petrol and diesel in India have deteriorated. Vasisht said during an ICRA webinar that some refiners have taken advantage of the export market, where realisations remain healthy.
The marketing businesses of OMCs face the opposite problem. Their acquisition costs are linked to international product prices, but domestic retail selling prices have not risen correspondingly. The result is an unusual split in which strong refining margins can partly support integrated OMC earnings while their fuel-marketing operations remain loss-making.
SAED Bridges Part Of The Gap
The Special Additional Excise Duty (SAED) has emerged as an important mechanism connecting the two sides of this equation. Export levies on diesel and ATF were introduced from March 27, 2026 and subsequently extended to petrol as international product prices and refining margins strengthened.
The SAED on diesel stood at Rs 20 per litre and at Rs 15 per litre on ATF from September 16, reflecting the strength in product cracks. For domestic supplies, SAED is adjusted in the refinery transfer price, reducing the effective product cost borne by OMC marketing divisions.
Vasisht explained that refinery transfer prices for auto fuels are linked to import and export parity. The SAED adjustment therefore provides a cushion to the marketing business when international product prices rise. It also reduces the incentive for refiners to divert products overseas solely to capture stronger export realisations, helping protect domestic fuel availability.
But ICRA's assessment is that export duties only partly cushion marketing losses. OMCs continue to absorb a substantial gap because domestic pump prices have not moved sufficiently to reflect international prices.
Crude Above $100 Keeps OMCs Under Pressure
ICRA's sensitivity analysis suggests that the problem becomes particularly acute if crude remains above $100 per barrel. Under a Brent crude assumption of $95-105 per barrel in the second half of FY27, ICRA estimates under-recoveries on auto fuels across several retail selling price scenarios. The losses remain substantial in a $105-115 per barrel environment and increase sharply if Brent averages $130-140 per barrel.
Retail price increases can reduce the burden, but the analysis indicates that moderate hikes would not necessarily eliminate under-recoveries when crude and international product prices remain elevated. ICRA said elevated crude prices and unchanged domestic fuel prices would put pressure on OMC profitability and cash flows while also increasing short-term borrowings as companies require more working capital. The ultimate impact on earnings in 2026-27 will depend on crude prices, product cracks, domestic retail price revisions and government support for LPG losses.
LPG Adds Another Layer Of Stress
Domestic LPG remains another significant source of under-recovery. The cumulative negative LPG buffer of OMCs had increased to Rs 61,940 crore as of June 30, 2026 as higher international LPG prices following West Asian supply disruptions were not fully passed on to consumers.
The estimated loss stood at around Rs 500 per domestic cylinder during the first quarter of 2026-27 before moderating to around Rs 300 in September. ICRA's sensitivity analysis suggests that even sizeable cylinder price increases would leave substantial losses if crude remains elevated.
At crude prices of $105-115 per barrel, annualised domestic LPG under-recoveries are estimated at around Rs 1.03 lakh crore if prices are unchanged. Even a Rs 90-per-cylinder increase would leave an estimated under-recovery of around Rs 87,000 crore. At crude prices of $115-125 per barrel, annualised under-recoveries could reach around Rs 1.21 lakh crore without a cylinder-price increase and remain above Rs 1 lakh crore even after a Rs 90 hike.
ICRA's presentation also showed Saudi Aramco contract prices for LPG moving above the net realisation available to Indian OMCs. Without a commensurate increase in domestic selling prices or additional government compensation, ICRA expects LPG under-recoveries to rise further if elevated international prices persist.
India Looks Beyond Traditional Crude Suppliers
The supply shock is simultaneously forcing attention onto India's ability to diversify its crude basket. Vasisht said Guyana, Nigeria, the US and Brazil could be explored as alternative sources as India seeks to maintain supplies amid geopolitical disruptions. “Our sense is the government cannot risk shortages of fuel,” he said.
ICRA's data showed a significant shift in India's crude sourcing pattern during the disruption. Russia's share increased sharply in recent months, while West Asia's contribution declined from earlier levels and South America's share increased. The shifts underline India's ability to alter its sourcing mix when individual supply corridors become difficult, although the economics of alternative barrels depend on crude grades, discounts and freight costs.
LPG poses a more concentrated supply challenge. Vasisht said India is procuring significant LPG volumes from the US, alongside Australia and some supplies from Canada. Saudi Arabia, the US and Australia are among the major global producers, meaning large volumes remain concentrated among relatively few countries.
Distance also matters. A US-to-India LPG shipment can involve a roughly 90-day round trip, making freight economics and vessel availability important constraints when India switches suppliers.
China Could Deliver The Next Demand Shock
While the immediate oil-price shock is predominantly supply-driven, the next source of pressure could come from demand if Chinese purchases rebound. Vasisht said China had been importing around 11-12 million barrels of crude a day before the escalation of the West Asian conflict. Imports subsequently dropped to around 8-9 million barrels per day.
China has substantial strategic reserves, giving it greater ability to reduce purchases during periods of elevated prices. But that also creates the possibility of a fresh demand impulse when it returns to the market. A rebound in Chinese crude purchases could become an additional driver of higher prices, Vasisht said.
There is, however, a countervailing force. Vasisht pointed to weakening global demand and slowing economies as factors that could eventually pull oil prices lower. During much of FY26, including the period surrounding retaliatory tariff announcements, Brent largely remained in the $65-70 per barrel range as concerns over slowing demand limited prices.
For now, however, supply disruption is dominating that demand weakness. The shutdown of Saudi Arabia's East-West pipeline has removed an important alternative route from the market, while disruption around the Strait of Hormuz threatens a much larger portion of global energy flows.
That leaves India's downstream sector facing two different versions of the same oil shock: refiners are capturing unusually strong product margins, while marketers are absorbing the cost of selling fuel domestically at prices that have not kept pace with the international market.