Fitch Ratings: Indian Oil Companies Poised to Withstand Russian Sanctions Impact

Fitch Ratings has assessed that India's prominent state-run oil marketing companies (OMCs) are well-positioned to absorb the effects of fresh United States sanctions targeting Russian energy firms Rosneft and Lukoil, as well as the European Union's ban on refined products derived from Russian crude. According to the rating agency, these measures are not expected to materially alter refining margins or the creditworthiness of rated Indian OMCs. The ultimate impact, however, will depend on the enforcement and longevity of these sanctions.

Russia currently constitutes a significant portion of India's crude oil supply, accounting for approximately 33% between January and August 2025. The availability of discounted Russian crude has historically bolstered the earnings before interest, taxes, depreciation, and amortization (EBITDA) and overall profitability of Indian OMCs. Fitch anticipates that Indian OMCs will comply with the sanctions, aligning with their stated public stances. It also noted that some refiners might continue to process Russian crude obtained through channels not covered by the sanctions.

The sanctions are projected to reduce the global demand for refined products linked to affected Russian crude, which could lead to wider product spreads. This scenario might offer some relief to refiners' profitability as they transition to more expensive alternatives and manage the inherent volatility in shipping and insurance costs. Refiners that continue to utilize Russian crude might also secure more substantial discounts, providing a degree of margin protection.

Fitch further indicated that the availability of ample spare crude production capacity globally should help to curb excessive increases in oil prices. The agency forecasts Brent crude oil prices to average $65 per barrel in 2026, a slight decrease from $70 per barrel in 2025.

However, the situation presents higher compliance risks for private refiners with substantial export markets in the European Union. Verifying the origin of crude oil becomes more challenging when different grades are blended before refining. These refiners may need to explore new markets, adjust their crude sourcing strategies, or enhance their systems for tracking product origins.

Indian OMCs reported EBITDA figures in the first half of FY26 that were generally in line with, or slightly exceeded, market expectations. This performance was supported by lower crude oil acquisition costs and strong margins on gasoil. Gross refining margins averaged between $6 to $7 per barrel during this period, an improvement from the $4.5 to $7 per barrel seen in FY25. Fitch projects mid-cycle refining margins to stabilize around $6 per barrel in FY27, driven by growing domestic demand, high refinery utilization rates, and anticipated lower crude prices, even amidst moderating global economic growth. Marketing margins are expected to remain steady, assuming no government intervention regarding retail prices or excise duties.

In a separate development to support OMCs in offsetting losses from subsidized Liquefied Petroleum Gas (LPG) sales, the government has approved a financial support package of Rs 300 billion for Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation in the second quarter of FY26. This funding aims to cover under-recoveries and strengthen the companies' financial liquidity.

Impact

This news suggests a limited direct impact on the profitability and credit profiles of major Indian Oil Marketing Companies. However, it highlights global geopolitical factors affecting the energy market, which could indirectly influence investor sentiment and volatility in related stocks. The rating agency's positive outlook provides some reassurance for investors in these public sector undertakings.

Rating: 3/10

Difficult Terms Explained:

• Sanctions: Official actions taken by one or more countries against another country, group, or individual, usually to penalize them for political reasons. In this context, they involve restrictions on trade, finance, or other activities related to Russian energy.
• Refining Margins: The profit a company makes from processing crude oil into refined petroleum products like gasoline, diesel, and jet fuel. It's the difference between the selling price of refined products and the cost of crude oil and refining.
• Credit Profiles: An assessment of a company's ability to meet its financial obligations and repay its debts. A strong credit profile indicates lower financial risk.
• EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company's operating performance before accounting for financing decisions, accounting decisions, and tax environments.
• Crude Imports: Oil that is brought into a country from another country.
• Crude Oil: Unprocessed petroleum found underground or offshore, which is then refined into various fuels and products.
• Product Spreads: The difference in price between refined petroleum products (like gasoline or diesel) and the crude oil from which they are made.
• Brent Crude: A major global oil benchmark, representing a type of crude oil sourced from the North Sea. It is widely used to price oil contracts worldwide.
• Compliance Risks: The potential for a company to face penalties or negative consequences due to failure to adhere to laws, regulations, or sanctions.
• EU: European Union, a political and economic union of 27 member states located primarily in Europe.
• Blended Grades: When different types of crude oil are mixed together before processing.
• Traceability Systems: Methods and technologies used to track the origin and journey of products, ensuring their authenticity and compliance with regulations.
• Gross Refining Margins: Similar to refining margins, but often calculated on a per-barrel basis, representing the revenue generated from refining crude oil minus the cost of crude oil, per barrel refined.
• Liquefied Petroleum Gas (LPG): A flammable hydrocarbon gas used as a fuel for heating, cooking, and vehicles.
• Subsidised Rates: Prices set below the market rate, often by government intervention, to make essential goods or services more affordable for consumers.
• Under-recoveries: The difference between the cost incurred by oil companies for selling fuel at regulated or subsidized prices and the actual market price they should have received.
• Liquidity: The availability of cash or easily convertible assets to meet short-term financial obligations.