Oil & gas sector faces margin squeeze as crude, LNG costs stay elevated: Report

New Delhi: India’s oil and gas sector is likely to remain under pressure in the near term as elevated crude prices, expensive imported LNG and weak fuel marketing margins squeeze downstream profitability, even as strong refining cracks provide some cushion, brokerage firm Equirus said in a research report. 

Equirus said the current environment remains challenging for oil marketing companies (OMCs), with petrol marketing margins turning further negative and diesel margins remaining deeply negative. Integrated margins have also moderated from their recent peaks, suggesting that stronger refining economics may not be sufficient to fully offset pressure on the marketing side.

Refining economics, however, continue to offer some support to the sector. Gasoline cracks remain around 45 per cent above their one-year average, while gasoil cracks are about 82 per cent above the one-year average. Jet fuel cracks have also remained strong, rising 71.6 per cent year-on-year, according to Equirus. The brokerage’s assessment suggests that refiners continue to benefit from robust product spreads, although the benefit is being increasingly offset by higher crude costs and marketing losses.

The gas segment faces another major challenge from elevated spot LNG prices. Asian spot LNG rose to $24/MMBtu in the week ended September 4, up 60.6 per cent year-on-year and 22.3 per cent over three months. Equirus expects LNG imports to soften from September after strong August arrivals, with higher LNG prices beginning to affect the cost structure of gas-consuming businesses.

The LPG market is also undergoing a structural shift following disruptions to supplies from West Asia. India has sharply increased sourcing from the US and is developing additional non-Gulf supply channels, but the shift comes at a higher delivered cost because of longer shipping distances and elevated freight rates. Equirus explicitly describes the trend as “India’s LPG diversification comes at a higher cost.”

For the broader sector, Equirus sees geopolitics, crude prices, LNG availability and freight costs as key variables for margins over the coming months. While refining spreads provide some protection, sustained weakness in marketing margins and higher gas and LPG sourcing costs could keep overall downstream profitability volatile.