Crude falls below $80, but OMCs still face ₹7/l petrol, ₹10/l diesel under-recoveries

The recent decline in crude oil prices following the U.S.-Iran ceasefire may have eased immediate concerns for India's oil marketing companies (OMCs), but profitability is likely to remain under pressure in the first quarter of FY27.

According to a report by PL Capital, OMCs are expected to report under-recoveries of ₹7 per litre on petrol and ₹10 per litre on diesel in Q1FY27, despite Brent crude falling below $80 per barrel and the government having cut excise duty by ₹10 per litre.

"We expect an under-recovery of ₹7.0/ltr and ₹10/ltr in Q1FY27, after considering a ₹10/ltr excise cut and capping of cracks at $10/bbl and $15/bbl for petrol and diesel respectively," the brokerage said in a sector update.

Notably, global benchmark Brent crude has dropped around 33% from its peak of around $120 per barrel during the height of the conflict by end of April.

The brokerage noted that Q1FY27 remained a challenging quarter for OMCs as the U.S.-Iran conflict pushed crude prices above $95 per barrel for much of the period, compressing fuel marketing margins. While crude prices softened after the ceasefire agreement was reportedly signed on June 17, the relief came too late to materially improve first-quarter earnings.

"The overall Q1FY27 performance remains weak as the benefit from lower crude prices was insufficient to offset the full-quarter impact of elevated input costs and compressed marketing margins," the report said.

PL Capital estimates that fuel marketing margins have deteriorated sharply during the quarter. Even after factoring in retail fuel price hikes undertaken in May 2026 and the excise duty reduction, profitability from petrol and diesel sales remains under strain.

Domestic LPG losses pegged at ₹500 per cylinder

Another major concern for the sector is domestic LPG. "Additionally, LPG continues to remain a key pain point, with losses estimated at around ₹500/cylinder for Q1FY27," the brokerage said.

The report highlighted that LPG under-recoveries rose sharply during the quarter due to supply disruptions caused by the West Asia conflict. According to management commentary during Q4FY26 earnings calls, LPG losses increased from around ₹170 per cylinder in April 2026 to ₹600-670 per cylinder in May 2026.

The situation has been exacerbated by rising international LPG prices. Saudi Contract Prices (CP), a key benchmark for LPG imports, are expected to average $796 per tonne in Q1FY27, up nearly 47% sequentially.

While crude prices have cooled, another risk looms over OMC earnings—the possibility of the government rolling back the ₹10-per-litre excise duty cut introduced during the energy crisis.

"The excise duty reduction was introduced as a crisis management measure rather than a permanent structural change," PL Capital noted. "With crude prices moderating, retail fuel price hikes implemented, and marketing margins turning positive, the government may gradually withdraw this benefit."

The brokerage estimates the excise duty cut results in an annual revenue loss of around ₹1.7 lakh crore for the government, making a phased rollback a distinct possibility.

Looking ahead, PL Capital believes crude prices may soften further if Iranian oil exports return to global markets and full normalcy is restored at the Strait of Hormuz. However, the downside may be limited as countries begin replenishing strategic petroleum reserves and inventories depleted during the conflict.

"We expect oil prices to decline initially as a gush of supply is expected to enter the market once safe passage through the Strait of Hormuz resumes. However, countries that utilised their strategic petroleum reserves and inventories during the conflict are likely to begin replenishing stocks, which could provide support to crude prices," the brokerage said.

Given the weak earnings outlook and lingering policy uncertainty, PL Capital has downgraded its ratings on state-run fuel retailers. The brokerage cut Indian Oil Corporation (IOCL) and Bharat Petroleum Corporation (BPCL) to "Reduce" and downgraded Hindustan Petroleum Corporation (HPCL) to "Hold", citing pressure on marketing margins, elevated LPG losses, and uncertainty over excise duty restoration.

"While near-term sentiment has improved, Q1FY27 losses and continued uncertainty around the excise duty rollback suggest that OMC profitability is likely to remain under pressure through FY27," the report said.