Whalesbook
India's Energy Landscape Faces Shifting Tides
India's push towards clean energy alternatives is visibly impacting traditional fuel consumption, leading to a significant slowdown in diesel and petrol demand growth. This trend, which began in fiscal year 2026, is projected to persist into 2027. Prashant Vasisht, Vice President & Co-Group Head (Corporate Ratings) at ICRA, highlights key shifts in the domestic oil and gas sector.
The Core Issue
Consumption growth for petroleum products (POL) experienced a sharp deceleration in fiscal year 2026. Over the first eight months, growth stood at a mere 1.4 percent year-on-year, a stark contrast to the historical average of 4 percent seen over the past decade. This slowdown is attributed to several factors, including the increasing adoption of more fuel-efficient vehicles, the expanding network of Compressed Natural Gas (CNG) stations, and the growing popularity of electric mobility.
Adding to the concerns, India's reliance on imported crude oil has intensified. The nation has crossed the 90 percent psychological barrier, with approximately 91 percent of its consumption met by crude oil imports during the first seven months of FY26. This increased dependence stems from a decline in domestic crude oil production coupled with rising demand.
Natural Gas Sector Challenges
The natural gas sector has also faced headwinds, with consumption growth turning negative for the first time in many years. A de-growth of approximately 4.5 percent year-on-year was recorded in the first seven months of FY26. This downturn is largely due to temporary shutdowns at several fertilizer plants and weak demand from the power sector.
Domestic gas production has also disappointed, falling in the initial seven months of FY26. Despite significant government initiatives and schemes aimed at boosting the biogas sector, production ramp-up has remained sluggish. Many biogas plants are operating at significantly reduced capacities, between 20 and 60 percent in FY26. While new capacities are being added, critical regulatory interventions are needed to address issues related to pricing, infrastructure, and taxation.
Financial Implications and Market Positives
A notable positive development has been the substantial fall in crude oil prices starting in April 2025. Brent crude prices dropped from around $77 a barrel on March 31, 2025, to $65 by April 10, and have since traded between $60 and $70 per barrel. This price correction has led to an increase in marketing margins for Oil Marketing Companies (OMCs) on petrol and diesel.
Retail prices for these fuels have remained stable since March 2024, allowing marketing margins to expand. Additionally, lower crude prices have eased the financial burden of under-recoveries on domestic Liquefied Petroleum Gas (LPG) sales. The government further supported the sector by announcing a ₹30,000 crore compensation package in August 2025 for the three public sector undertaking (PSU) OMCs to cover LPG under-recoveries.
Strategic Shifts and Discoveries
In response to declining consumption growth rates, OMCs are becoming more strategic in their planning. New refinery projects are increasingly being conceptualised with a significantly larger petrochemical component, sometimes as high as 40 to 50 percent. This indicates a diversification strategy to mitigate risks associated with traditional fuel demand.
Another significant announcement is the introduction of a unified tariff regime, moving from a three-zone tariff structure to a two-zone system, simplifying tariffs with an ultimate goal of a single national tariff. Furthermore, the discovery of substantial deposits in the Andaman Sea presents considerable potential for future domestic production.
Future Outlook for 2026
Looking ahead to fiscal year 2027, crude oil prices are expected to average between $60 and $70 per barrel, influenced by muted global demand growth and increasing global electrification. Supplies are also anticipated to rise with contributions from non-OPEC producers.
Despite these price levels, the profitability of domestic crude oil producers is projected to remain healthy, with no anticipated cutbacks in capital expenditure plans. Domestic POL consumption is expected to grow modestly at only 1-2 percent. Gross Refining Margins (GRMs) in Singapore are forecast to remain in the $4-5 per barrel range. Natural gas consumption, however, is anticipated to rebound and grow in FY27, reversing the trend of stable or negative growth seen in FY26.
Impact
This evolving energy landscape presents a mixed bag for stakeholders. Consumers may benefit from stable fuel prices in the short term, but the rising import dependence poses long-term energy security concerns for India. Oil marketing companies are adapting through improved margins and strategic diversification into petrochemicals. Domestic producers are expected to maintain profitability despite slower demand. The government's supportive measures, like the LPG compensation package, are crucial for maintaining the viability of PSU OMCs. The discovery in the Andaman Sea could offer future domestic supply relief. The overall impact rating is 7/10, reflecting significant economic and strategic implications for India.
Difficult Terms Explained
- POL: An abbreviation for Petroleum, Oil, and Lubricants, referring to all products derived from crude oil used as fuel.
- OPEC+: An alliance of oil-producing countries, including OPEC members and allies like Russia, that coordinate production levels to influence global oil prices.
- Brent prices: The global benchmark price for crude oil, typically referring to the price of Brent crude oil, a light, sweet crude oil extracted from the North Sea.
- Marketing margins: The profit a company makes from selling a product after deducting all direct costs associated with selling it.
- LPG under-recoveries: The difference between the cost of supplying domestic LPG and the controlled selling price, representing a subsidy or loss for the oil companies.
- PSU OMCs: Public Sector Undertaking Oil Marketing Companies, government-owned companies involved in refining, distributing, and marketing petroleum products in India.
- CNG: Compressed Natural Gas, a cleaner alternative fuel for vehicles, primarily methane, stored under high pressure.
- EVs: Electric Vehicles, vehicles powered by electricity stored in rechargeable batteries.
- GRMs: Gross Refining Margins, a key profitability indicator for oil refineries, representing the difference between the price of crude oil and the value of the refined products derived from it.