Oil prices top $108 in Sept quarter as Iran war disrupts supply; Will OMCs’ Q2 earnings take hit?

Oil prices witnessed sharp spike in September amid renewed US-Iran tensions, with Brent crude peaking at $108.8 a barrel and averaging around $91.4 a barrel in the July-September quarter. The rise in energy prices, alongside elevated liquefied natural gas (LNG) prices and rupee depreciation, is expected to have a mixed impact on India’s oil and gas companies in the second quarter of FY27.

While oil marketing companies (OMCs) are expected to report a sequential improvement in Q2 earnings, supported by stronger refining margins and lower crude prices compared with the June quarter, marketing margins are likely to remain under pressure. City gas distributors (CGDs), meanwhile, face margin compression as higher spot LNG prices and lower availability of domestic gas outweigh the benefits of price hikes, as per brokerages.

According to PL Capital, aggregate sales of companies in its oil and gas coverage universe are expected to grow 39.4% year-on-year (YoY) and 4.1% quarter-on-quarter (QoQ) in Q2FY27. EBITDA and profit after tax (PAT) are projected to decline 5.6% and 11.1% YoY, respectively, but rise 41.2% and 51.9% sequentially, led by a recovery in OMCs and resilient upstream performance.

Brent crude averaged $91.4 a barrel in Q2FY27, against $96.9 a barrel in Q1FY27. Prices averaged $86 a barrel in July and August before rallying in September as renewed US-Iran tensions and fading prospects of peace talks heightened supply concerns.

OMCs to gain from stronger refining margins

OMCs are expected to report a sequential earnings recovery as elevated global refining margins and softer crude prices support refining profitability. Tight product supplies helped sustain refining cracks during the quarter, particularly for middle distillates such as diesel and aviation turbine fuel.

PL Capital estimates gross refining margins (GRMs) of $20.8, $19.2 and $15.4 a barrel for Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL), respectively. MRPL’s GRM is estimated at $11.2 a barrel.

However, marketing margins are likely to remain under pressure, although losses are expected to narrow from the previous quarter. PL Capital estimates gross marketing margin losses of ₹3.5 per litre for IOC and ₹3.6 per litre each for BPCL and HPCL, compared with ₹12.8, ₹16.3 and ₹14.9 per litre, respectively, in Q1FY27.

IOC and BPCL are expected to report EBITDA of ₹94 billion and ₹21.3 billion, respectively, while HPCL is likely to post an EBITDA loss of ₹20.9 billion. PL Capital has revised its FY27 earnings estimates for OMCs upwards, citing better refining performance and softer crude prices compared with the June quarter. It has upgraded BPCL to Accumulate from Hold and HPCL to Hold from Reduce.

Reliance Industries (RIL) is also expected to benefit from improved refining margins, higher throughput and continued momentum in its telecom business, partly offset by subdued retail performance. Systematix Institutional Equities estimates RIL’s EBITDA to rise 7.6% YoY to ₹494 billion, with PAT projected at ₹226 billion. Its oil-to-chemicals business is expected to benefit from stronger refining margins, while Jio’s revenue is projected to grow around 11% YoY.

Higher LNG costs to pressure city gas margins

City gas distributors are expected to face margin pressure as higher spot LNG prices and declining availability of domestic APM gas outweigh the benefits of price increases, despite healthy volume growth.

Spot LNG averaged $22.1 per million British thermal units (MMBtu) in Q2FY27, up 25.6% QoQ and 86.7% YoY, according to Systematix. Prolonged disruption to LNG flows through the Strait of Hormuz, European restocking and increased spot buying from Asia contributed to the rise. Rupee depreciation added to procurement costs.

PL Capital expects EBITDA per standard cubic metre (scm) to decline to ₹2.4 for Indraprastha Gas (IGL), ₹7 for Mahanagar Gas (MGL) and ₹4.5 for Gujarat Gas in Q2FY27, compared with ₹3.4, ₹7.9 and ₹5.2, respectively, in the previous quarter.

Systematix estimates IGL’s EBITDA to fall 33% YoY to ₹3 billion, while MGL’s is projected to decline 7% to ₹3.1 billion. Both companies are expected to record healthy volume growth, but higher gas costs are likely to weigh on margins.

GAIL and Petronet LNG are expected to deliver mixed performances. Systematix projects GAIL’s EBITDA to rise 110% YoY to ₹67.1 billion, supported by stronger marketing and trading profitability, higher transmission earnings and healthy liquid hydrocarbon contribution. PL Capital, however, expects GAIL’s EBITDA to decline sequentially to ₹46.7 billion from ₹63.8 billion in Q1FY27 as trading profitability normalises.

Petronet LNG’s EBITDA and adjusted PAT are expected to rise 34% and 37% YoY, respectively, according to Systematix, supported by higher regasification margins, spot cargo contribution and tariff increases. Despite near-term pressure on parts of the sector, Systematix prefers RIL, Petronet LNG, Deep Industries and Gulf Oil Lubricants among its top picks.

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