State-owned oil marketing companies (OMCs) are poised for a strong start in the first quarter of 2025-26, driven by lower crude oil prices and improved refining margins, according to analysts. The anticipated earnings boost is further fueled by a recent government decision to increase domestic LPG prices by ₹50 per cylinder, reducing the burden of under-recoveries.

Anticipated Earnings Growth for OMCs

Analysts at Motilal Oswal highlight that the earnings for Q1FY26 are likely to benefit significantly from the recent LPG price hike. This adjustment is expected to alleviate the financial pressures on OMCs. The decline in propane prices, attributed to a decrease in winter demand, adds another layer of positive momentum. Additionally, the proportion of Russian crude sourced by OMCs is expected to rise, enhancing gross refining margins during this quarter.

• Key Factors Contributing to Earnings:
  • Recent ₹50 increase in domestic LPG prices
  • Drop in propane prices due to seasonal demand fluctuations
  • Increased sourcing of Russian crude

Positive Market Conditions

According to Elara Capital, the government is likely to permit OMCs to earn above historical integrated margins, aiding in their energy transition amid a backdrop of declining crude oil prices. In Q1FY26, international crude prices have dipped to $65 per barrel, a $10 per barrel decrease compared to Q4FY25. This drop has positively influenced OMCs’ gross margins for gasoline and diesel, which have improved by approximately ₹3.5 per liter, despite a recent ₹2 per liter excise duty hike.

• Impact of Crude Price Decline:
  • A $1 per barrel reduction in crude oil increases gross margins for gasoline and diesel by ₹0.55 per liter.
  • Expected average crude price for the fiscal year is projected at $70 per barrel.

Optimistic Projections for Integrated Margins

Elara Capital forecasts that the integrated margin (EBITDA per unit) for BPCL will surge by 49% in FY26, reaching ₹4,023 per ton. For IOCL, the projected increase is even more impressive, with an expected rise of 91% against FY25 levels, bringing the integrated margin to ₹4,000 per ton.

Despite the recent excise duty increase on petrol and diesel, analysts remain optimistic about OMCs’ earnings. Current marketing margins are averaging above ₹12 per liter, mitigating concerns about profitability.

Risks and Considerations

However, the earnings outlook for OMCs is not without challenges. Analysts warn of potential inventory losses in Q1FY26 due to the weak crude price environment, contrasting with inventory gains recorded in Q4FY25. Additionally, there are concerns regarding possible further excise duty hikes on fuel, which could compress marketing margins.

• Potential Risks:
  • Expected inventory losses in Q1FY26
  • Possibility of further excise duty increases on fuel
  • Historical data shows OMCs rarely maintain gross marketing margins above ₹8-10 per liter for extended periods.

Impact on Exploration Companies

For upstream players like Oil and Natural Gas Corporation Ltd. and Oil India Ltd., the decline in oil prices may negatively impact revenue and crude price realizations. Motilal Oswal forecasts Brent crude to average $65 per barrel in FY26 and FY27, but warns of downside risks to both oil and gas realizations. A $1 per barrel drop in Brent prices could lead to a 2% decrease in profit after tax (PAT) for both ONGC and OIL.

In summary, while state-owned OMCs are set for a promising start to the fiscal year, various market factors and potential risks will play a critical role in shaping their financial outcomes. Stakeholders will be keeping a close eye on these developments as the market evolves.