BPCL and IOCL are better positioned than HPCL to benefit from improving refining margins, according to a recent report from global brokerage firm UBS.
UBS said that refining profitability for Indian players is set to improve amid rising spreads for middle distillates, primarily diesel and jet/kero, as geopolitical tensions disrupt supplies from the Middle East.
The brokerage wrote in its note that Indian refiners have a product slate that is heavily skewed towards middle distillates, with yields at 53% for IOCL, 54% for BPCL, and 46% for HPCL. Tighter supply conditions globally, especially in Europe and Asia, are expected to push up spreads further, aiding refining margins for Indian OMCs.
The disruption follows reported damage to key refinery infrastructure in the Middle East. Israel’s 200kb/d Haifa refinery has been shut due to a missile strike, while Iran’s Tehran and Tabriz refineries were also reportedly affected.
Meanwhile, Egypt has increased diesel imports in response to reduced gas supplies from Israel. UBS said that around 14% of global clean product flows passed through the Strait of Hormuz in 2024.
Tighter supplies from the region are likely to particularly impact Europe, which imports 40% of its middle distillates, primarily jet fuel, from the Middle East. Ongoing closures of refineries in the UK and Germany are further adding to the pressure.
However, while refining margins are poised to strengthen, UBS mentioned that India’s retail diesel and petrol prices have remained broadly stable over the past three years. This stability means any rise in refining margins could be offset by a fall in marketing margins, assuming crude prices remain constant.
That said, marketing margins are still higher than historical averages at current crude levels of around $70 per barrel.
Further, UBS said that IOCL and BPCL are better positioned in the current environment because they produce more of the fuels they sell, compared to HPCL. The marketing-to-refining ratio for diesel and gasoline stands at 1.2 for IOCL and BPCL, versus 2.1 for HPCL, implying a higher refining exposure for the former two companies.
