Indian refiners’ margins may shrink but supply likely to remain intact in absence of Russian barrels: Experts

Indian Refiners Brace for Margin Pressure Amid Shifting Global Crude Dynamics

India’s refining sector is preparing for a potential squeeze in profit margins following mounting uncertainties over Russian crude oil supplies. Industry experts believe that while India’s access to cheaper Russian barrels may diminish due to geopolitical pressure and logistical constraints, domestic fuel supply is unlikely to be disrupted in the short to medium term.

This comes at a time when Indian refiners have grown significantly reliant on discounted Russian Urals and other grades since the imposition of Western sanctions on Moscow in the wake of the Ukraine conflict. However, evolving enforcement of price caps, logistical bottlenecks in the Black Sea, and rising freight costs have begun to affect the consistent flow of these barrels to Indian shores.

Russian Crude Discount Narrows, Threatening Margins

Since 2022, India has emerged as a key buyer of Russian crude, especially the Urals grade, thanks to heavy discounts that at times reached up to $30 per barrel below Brent. These discounts allowed Indian refiners such as Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Reliance Industries to post robust gross refining margins (GRMs).

However, analysts now note that the differential between Russian grades and benchmark crude has narrowed sharply.

“The discount on Russian Urals has contracted to as low as $3–5 per barrel, significantly reducing the cost advantage Indian refiners previously enjoyed,” said Deepak Mahurkar, Partner and Leader - Oil & Gas at PwC India. “This will inevitably impact GRMs unless compensated by higher refining throughput or improved product crack spreads.”

Supply Diversification Steps in

Despite the anticipated dip in margins, supply continuity is unlikely to face major hurdles, thanks to India's diversified sourcing strategy.

India has already started ramping up imports from traditional partners such as Iraq, Saudi Arabia, and the UAE. African grades, particularly from Nigeria and Angola, are also seeing renewed interest due to favorable freight economics.

“We don’t see any immediate threat to domestic fuel availability,” said Vandana Hari, Founder of Vanda Insights. “Indian refiners are well-equipped to pivot to other crude sources. While this may be more expensive, it will not result in supply gaps.”

In FY24, Russian crude accounted for nearly 35% of India’s imports, a figure that may decline by a few percentage points if logistical and pricing issues persist.

Geopolitical and Market Context

The waning flow of Russian barrels to India comes as global oil markets remain tight, with OPEC+ production cuts and rising summer demand pushing Brent crude to around $84–$87 per barrel.

Additionally, the G7 price cap enforcement has intensified. New measures target ships and shipping companies violating the $60 per barrel threshold for Russian oil. Consequently, insurance and maritime services for non-compliant shipments are at risk, making trade with Russia more challenging.

“The cost of compliance has increased,” said Anish De, Global Head - Energy & Resources, KPMG. “Freight rates for Russian cargoes are spiking, and there’s also a reputational risk for companies that deal in sanctioned oil. This is forcing Indian buyers to tread carefully.”

Refinery Utilization and Domestic Demand Outlook

India’s refining utilization remains robust, with most plants operating at above 90% capacity in anticipation of festive and harvest season demand. Domestic consumption of diesel and petrol has been on an upward trajectory, driven by strong economic growth, rural recovery, and increased vehicular mobility.

According to the Petroleum Planning and Analysis Cell (PPAC), diesel demand rose by 4.6% in the April-June quarter compared to the same period last year, while petrol consumption increased by 5.8%.

Even with higher input costs, refiners may choose to maintain higher throughput to cater to growing domestic and export markets.

Investor Outlook: Margin Volatility, Not Structural Risk

For investors, the key risk lies in margin volatility rather than structural supply disruptions. Shares of major oil marketing companies (OMCs) like IOC, BPCL, and HPCL have remained relatively stable, reflecting confidence in the resilience of the sector.

However, analysts caution that tighter margins may limit upside potential in the near term.

“We anticipate GRMs for Indian refiners to moderate from the highs of $10–12 per barrel to around $6–8 per barrel in Q2 FY25,” said Suresh Ganapathy, Research Analyst at Macquarie. “While this is still above long-term averages, the margin compression could impact earnings growth unless offset by inventory gains or forex tailwinds.”

Private refiners such as Reliance and Nayara Energy, with greater export exposure, may also face pressure if global fuel demand softens or if product cracks weaken.

Adaptation Over Alarm

While the shrinking margin cushion from Russian crude may test the agility of Indian refiners, the broader outlook remains stable. With a diversified import strategy, healthy domestic demand, and robust refining infrastructure, the sector appears well-positioned to navigate the evolving energy landscape.

For now, investors and policymakers alike will be closely monitoring the balance between profitability and supply security, as India's refining story continues to be shaped by geopolitics and market forces alike.