India’s Oil and Gas demand set to remain robust in FY26 despite weak global margins

India Ratings and Research (Ind-Ra) forecasts a strong demand for oil and gas in the financial year 2026, despite subdued global demand impacting refining margins. The agency highlighted that robust domestic demand for petroleum products and favorable marketing margins are expected to stabilize the credit profile of downstream companies, even with compressed Gross Refining Margins (GRMs), ensuring healthy overall EBITDA.

However, under-construction refinery expansion projects may lead to an increase in debt for major oil marketing companies (OMCs). For upstream companies, the credit profile remains contingent on crude oil prices. Ind-Ra anticipates that while EBITDA generation for these companies may dip due to lower oil prices and reduced production from legacy fields, the impact could be mitigated by the removal of special excise on crude production and increased output from new discoveries.

According to Bhanu Patni, Associate Director of Corporates at Ind-Ra, the projected strength in India’s oil and gas demand for FY26 is expected to drive expansions in refinery and petrochemical capacities. He noted that India’s refinery capacity is slated to grow by 22% over the next two to three years, a development poised to influence investment decisions in the sector.

The City Gas Distribution (CGD) sector is also expected to maintain a stable credit profile in FY26, even after a reduction in low-cost domestic gas allocations. Although returns on invested capital might moderate, they are expected to remain at healthy levels. Challenges in capital expenditure execution could arise in new geographical areas, as internal accruals for funding such projects may decrease.

Standalone petrochemical players are projected to perform better in FY26, benefiting from improved crack spreads and a resolution of oversupply issues caused by significant capacity additions during FY19-FY24, especially in China.

Ind-Ra also predicts subdued GRMs in FY26, mirroring trends from the first half of FY25, driven by weak global consumer and industrial demand, particularly in China, and the influx of additional refinery capacities globally. Despite these pressures, India’s demand for petroleum products—primarily diesel, petrol, and LPG—is expected to remain robust.

Integrated OMCs saw stable retail prices, declining crude oil prices, and healthy marketing margins supporting their EBITDA during the first half of FY25. This trend is likely to persist in FY26. Additionally, standalone petrochemical players and integrated refiners are set to witness improved EBITDA as petrochemical spreads recover from the lows of FY24.

Upstream companies are expected to retain healthy margins, even amid declining crude oil prices, which are projected to stay above USD 65 per barrel. With break-even production costs estimated at USD 40-45 per barrel, these companies could achieve EBITDA margins of USD 20-30 per barrel.

Oil prices averaged USD 78.7 per barrel in Q2 FY25 and dipped further to USD 75.2 in October 2024 and USD 73.02 in November 2024. Future crude prices will largely depend on global geopolitical developments, demand recovery, and production targets set by OPEC+.

In the CGD segment, reduced domestic gas allocations and declining production of Administered Price Mechanism (APM) gas have lowered priority allocations, especially for CNG. This reduction is likely to expose sector players to the challenges of managing long-term supply contracts.

Despite global challenges, India’s oil and gas sector is positioned for growth, underpinned by strong domestic demand and strategic investments aimed at meeting the evolving energy landscape.