Indian fuel retailers face margin pressure amid rising energy prices: Rating agencies

New Delhi: India’s state-owned oil marketing companies (OMCs) — Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Limited (HPCL) — are facing mounting pressure from rising global crude and gas prices, limited domestic price pass-through, and heavy dependence on imported energy, according to global rating agencies.

India imports nearly 88 per cent of its crude oil and about half of its natural gas requirements, with roughly 30–55 per cent of supplies transiting through the Strait of Hormuz. Strategic petroleum reserves in the country cover about 10 days of consumption, while commercial inventories account for roughly 65 days, leaving the fuel retailers vulnerable to supply disruptions.

In separate assessments, S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings highlighted the risks from the widening West Asia conflict triggered by military action by the United States and Israel against Iran, followed by Tehran’s retaliation.

Fitch said a prolonged disruption to Iranian oil or LNG supplies could weigh on the near-term credit metrics of Indian oil firms, although strong government backing provides a buffer.

Domestic retail fuel prices have remained largely unchanged since April 2022, reflecting government influence over pricing and the companies’ dominant share of nearly 90 per cent of fuel outlets in the country.

Moody’s said limited adjustments in retail prices shift the burden of rising input costs onto OMCs, compressing marketing margins and weakening cash flows during periods of sustained high energy prices.

Previous price spikes, such as those following the Russia-Ukraine conflict, resulted in temporary losses for OMCs, though some were later offset when crude prices eased.

Amid supply disruptions in West Asia, the government has asked refiners to maximise production of LPG and raised domestic LPG prices by Rs 60 per 14.2 kg cylinder. Rating agencies noted that losses from selling LPG below market prices may be offset through government subsidies. A Rs 30,000 crore compensation package for fiscal 2024–25 is currently being disbursed in monthly instalments.

Standalone refiners such as Reliance Industries could see mixed effects from higher crude prices. While inventory gains may offer short-term benefits, prolonged supply constraints could force refinery run cuts.

According to S&P, India will continue to rely heavily on maritime routes for crude imports, though diversification remains possible. The country has historically sourced oil from regions outside Asia, including Russia and South America.

Imports from Russia currently stand at about 1.1 million barrels per day, while purchases from Venezuela resumed last month at around 142,000 bpd.

Rating agencies said government directives and rising input costs could squeeze margins if petrol and diesel prices remain unchanged to contain inflation.

Authorities may respond with measures such as budgetary support or excise duty cuts — as seen during the Russia-Ukraine crisis — though the likelihood of such interventions remains uncertain.

Fitch also noted that OMCs and GAIL (India) Limited could face cash flow pressure if oil and gas supply disruptions persist.

Among the major retailers, Bharat Petroleum Corporation Limited currently has the strongest balance-sheet buffers to absorb prolonged shocks, while Indian Oil Corporation Limited and Hindustan Petroleum Corporation Limited also retain adequate financial headroom.