What’s Keeping Oil Refiners Afloat Amid Global Tensions?

Investors have been pleasantly surprised by the latest earnings from India’s public sector oil refiners. Despite global crude price swings and a dip in cheap Russian oil imports, Indian Oil Corporation (IOC), Bharat Petroleum (BPCL), and Hindustan Petroleum (HPCL) all delivered strong results in Q2 FY26 (July–September 2025). 

Let’s break down how these refining giants managed to thrive in turbulent times, and what it means for investors.

Strong Q2 Results Despite Volatile Crude

Profits Surge: All three PSU refiners posted stellar Q2 FY26 numbers. IOC swung to a ₹7,817 crore profit (from ₹169 crore last year), BPCL’s profit jumped 170% YoY to ₹6,191 crore, and HPCL’s profit rose 507% YoY to ₹3,859 crore.

Revenue Growth: Revenue from operations was modest but steady. IOC up 4% YoY to ₹2.07 lakh crore; BPCL and HPCL up 2%–3% to ₹1.21 lakh crore and ₹1.10 lakh crore, respectively. While sales volumes and turnover grew only slightly, profits soared, indicating significantly improved margins.

Margin Expansion: The refiners’ gross refining margins (GRMs), essentially their profit per barrel of crude processed, shot up dramatically. IOC’s GRM soared to $10.6 from $1.6 a year ago, BPCL’s rose to $10.8 from $4.4, and HPCL’s climbed to $8.8 from $3.1, a clear sign that stronger refining margins headlined most of the Q2 show.

PSU Refiners Shine Amid Volatile Crude

Source: Company filings

These healthy refining margins could be a key driver of the earnings jump, helping offset the challenges of input cost volatility.

It’s impressive that amid global tensions, our state-run refiners positively sailed ahead, with profits hitting multi-year highs. So, what’s behind this stellar performance?

What Drove the Q2 Surge? 

According to the International Energy Agency (IEA), India’s energy demand is projected to rise by an average of 3% annually till 2035, the fastest among all emerging markets and developing economies. 

Several tailwinds converged to buoy the refiners’ results:

Softer Crude Oil Prices: International crude prices actually declined during the previous quarter. Brent crude oscillated but averaged lower than in FY25, easing input costs. A 7.5% drop in crude input cost helped IOC trim its total expenses by ~1.5% YoY. A classic case of “lower feedstock cost results in better margins.”

Robust Crack Spreads: Here’s where it gets interesting. Fuel crack spreads (the difference between crude prices and refined product prices) surged. Think of a crack spread as the profit margin per barrel of crude turned into products.

• Diesel cracks jumped 37% year-on-year to $18.7 per barrel
• Petrol cracks rose 24% to $8.4 per barrel
• Jet fuel cracks climbed 22% to $8.4 per barrel​

Source: Economic Times report

Why did this happen? Several reasons. Diesel inventories in Asia and Europe reached multi-year lows, partly due to Ukrainian drone attacks targeting Russian refinery capacity, which cut diesel exports. Petrol got support from tighter inventories in Asia as Chinese exports slowed. Jet fuel demand remained strong globally.

Inventory Gains: Timing worked out in the refiners’ favour. When oil prices ticked up during the quarter after they had bought cheaper crude earlier, it led to inventory valuation gains. IOC saw an inventory gain of about $1.7 per barrel in Q2, versus an inventory loss of $4.8 per barrel in the prior quarter. Essentially, the crude sitting in their tanks appreciated as prices rose from recent lows, adding an accounting profit. 

India’s Refining Edge and the Road Ahead

Apart from quarterly ups and downs, there’s a bigger picture: India’s strategic advantage in refining and how these PSU players are positioning for the future.

Giant Capacity, Global Rank: India is already a refining powerhouse with over 5 million barrels per day of capacity (roughly 250+ million metric tons per annum), making it the world’s fourth-largest refining base. IOC alone (with subsidiary CPCL) controls a third of this capacity. 

Expansion on the Menu: India’s total capacity is set to rise over 20% by 2028 to ~310 million MT/year as new projects come. For instance, HPCL’s new Rajasthan refinery (9 MMTPA) is nearing commissioning, and Chennai Petroleum (IOC’s unit) is building a 9 MMTPA refinery in Tamil Nadu by 2027. Even BPCL is eyeing a large greenfield refinery (with Oil India) of 9–12 MMTPA capacity, having secured approvals and land. These will boost India’s rank, possibly from no. 4 to no. 2 globally by the next decade.

Why is this important? Because scale matters. Larger capacity and efficient complex refineries allow Indian companies to process cheaper heavy crudes and export surplus fuel. India often runs its refineries above 100% utilisation to meet domestic and overseas demand. This aggressive operation is feeding an export boom.

Export Opportunity: Global geopolitics is also at play for Indian refiners in export markets. With Europe shunning Russian fuel due to the Ukraine war, and some regions facing shortages, Indian diesel and gasoline exports have surged to multi-year highs. Europe, in particular, is hungry for diesel. In the words of India’s Petroleum Minister, “Our high-speed diesel and motor spirit are powering global markets”. 

Notably, expanded capacity and ethanol blending have enabled higher exports. India has recently achieved its target of 20% ethanol blending in petrol (E20) in March 2025, five years ahead of the original 2030 deadline. So, the PSU refiners stand to gain as India positions itself as a refining and fuel export hub amid global supply shifts.

Green Transition and New Ventures: PSU refiners are steadily diversifying into clean energy. IOC targets 31 GW of renewables by 2030, including solar, wind, and green hydrogen, with a major 10,000 TPA hydrogen plant at Panipat. BPCL is investing in ethanol, green hydrogen, and EV charging, while HPCL is piloting biofuel and solar projects across its facilities.

Risks on the Horizon

It isn’t all smooth sailing for the refiners; investors should be mindful of the risks and challenges.

Geopolitical and Sanction Risks: US and EU sanctions on major Russian oil producers like Rosneft and Lukoil have forced Indian refiners to sharply cut Russian crude imports, which previously accounted for a substantial part of their crude intake. According to a news report, India has scaled back purchases of Russian crude for arrival in December, showing that Western sanctions and trade talks with the US are having a major impact on buying patterns. 

Delays and Slowdown: India’s refining capacity has only grown 5% over the last seven years, far below the targeted 69% expansion. Several key refinery expansion projects by major players like Nayara, Reliance, and Indian Oil Corporation face delays due to land acquisition issues, pandemic-related disruptions, and climate concerns. This limits the sector’s ability to meet growing domestic and export demand.

Market Demand and Margin Volatility: Although Q2 saw strong profits due to favourable global crude prices and product cracks, these factors remain volatile. Diesel, petrol, and jet fuel margins can be influenced by global inventory levels, geopolitical events, and demand patterns, making profitability uncertain in the medium term.

ESG and Long-term Transition: Over a longer horizon, the trend towards electric vehicles (EVs), renewable energy, and climate change policies poses a structural challenge. While India’s oil demand is still growing steadily, the “energy transition” will eventually cap the growth of fossil fuels. Pressure from investors regarding Environmental, Social, Governance (ESG) criteria is rising; PSU refiners may face higher scrutiny on emissions, carbon footprint, and sustainability. 

In summary, investors should view these stocks with an understanding that today’s bumper profits are part of a larger cyclic and structural context.

What Investors Should Watch Out For

Global Crude Trends: Oil at $70–80 per barrel is the sweet spot, high enough for margins, low enough to signal steady demand. Sharp spikes (from OPEC cuts or conflicts) can hurt refiners via inventory losses and delayed retail price hikes. A steep fall can also squeeze crack spreads. For investors, price stability is the best visibility.

Refining Margins (GRMs): Track Singapore GRM and company-reported margins. Singapore GRMs are the benchmark for global pricing. High throughput with strong margins means a windfall; any decline will quickly reflect in OMC stock prices.

Government Policy: Watch for policy changes like excise duty tweaks, LPG subsidy revisions, and windfall tax, all of which can alter earnings. Policy risk remains ever-present in this sector.

PSU refiners have turned global volatility into record profits, but refining is a cyclical business. Margins, crude swings, and policy shifts can flip sentiment fast.

To Sum Up

For investors looking to tap into India’s growing energy appetite and the strategic positioning of its refining ecosystem, there are smarter ways than chasing individual stocks. You can explore curated model portfolios on smallcase that focus on themes like India’s energy transition, PSU leaders, or rising capital expenditure cycles, all of which reflect parts of this refining story. These portfolios bundle stocks into diversified, research-driven baskets aligned with long-term structural trends. Check out smallcases here.

Disclaimer: This analysis is for educational purposes and does not constitute investment advice. Market conditions can change, and past performance is not indicative of future results. Investors should conduct their own research and/or consult a certified financial advisor before making investment decisions.