India's Oil Stocks Split on Iran-Israel Crisis

When crude oil prices surge 13% overnight in a single session, as they did Friday after Israel's strikes on Iran, India's fossil fuel sector reveals its fundamental divide: those who dig/drill it up versus those who process it.

The upstream fossil fuel producers celebrated. Oil and Natural Gas Corporation closed Friday up 1.28%, making it the second largest gainer in the Nifty-50 index after defence stock BEL, while Oil India  gained  2.17% on the same commodity tailwinds. 

Meanwhile, companies that buy crude oil as a raw material faced immediate pain. Oil marketing companies bore the brunt, with Indraprastha Gas, BPCL, HPCL, Indian Oil Corporation, and Chennai Petroleum sliding 1-4%. Gas distribution companies also felt the squeeze, with GAIL India, Mahanagar Gas Gujarat Gas, and Petronet LNG falling 0.1-2%. Reliance Industries, despite its diversified portfolio, slipped 1% as investors focused on its massive refining operations.

The divergence reflects a basic commodity truth: when prices spike, producers win and processors lose. 

Brent crude settled around $74 per barrel Friday after surging as much as 13% earlier, marking the biggest single-day gain since March 2022. The rally followed Israel's unprecedented strikes on Iranian nuclear facilities, prompting Iran to retaliate with hundreds of ballistic missiles.

Import Dependency Comes Home to Roost

The pain among oil companies varies significantly, reflecting different business model vulnerabilities. 

According to analysts, BPCL and HPCL face inventory losses of $1.5-2.0 per barrel at $70 crude, with HPCL particularly exposed to inventory losses from price spikes due to its large auto fuel retail exposure. Indian Oil faces the steepest hit of up to $4 per barrel due to its extended inventory cycle vulnerability, which leaves it more exposed to sudden commodity price swings than peers.

Gas companies face distinct pressures from higher input costs and regulated pricing constraints. GAIL suffers from LNG import price volatility as India's largest gas transmission company, while city gas distributors like Mahanagar Gas and Gujarat Gas cannot pass through cost increases to consumers due to regulatory frameworks, creating gas distribution margin pressure. Petronet LNG faces direct LNG import cost increases as India's primary import gateway, making it vulnerable to international price spikes.

Reliance Industries presents a complex case where refining headwinds offset diversification benefits.While refining margin compression hurts its core business, the company's integrated petrochemicals operations and global scale provide some cushioning that pure-play refiners lack. The stock's fall reflects investor focus on the immediate refining margin impact despite its diversified business model. Despite some analysts maintaining their positive outlook on HPCL, BPCL and Indian Oil, government subsidies will be needed to support the sector through this period of higher input costs and regulated pricing pressures.

The upstream story is more compelling. ONGC benefits directly from higher crude prices with minimal international exposure, while Oil India offers higher potential upside given its aggressive exploration activities and smaller market cap. Both function as domestic energy security plays, insulated from West Asia disruptions while benefiting from global price volatility.

Geopolitical Risk Reframes Energy Portfolios
Higher oil prices typically accelerate renewable energy adoption. Adani Green Energy, India's largest renewable company with over 14 GW of operational capacity and plans to reach 50 GW by 2030, might see faster growth if energy security concerns mount. The timing aligns with India's goal of 500 GW non-fossil fuel capacity by 2030.

Israel-Iran conflict exposes fundamental investment tensions. Oil marketing companies offer steady dividends and government backing but face structural headwinds from volatile input costs and regulated pricing that prevent quick pass-through of higher commodity costs. Refining margin compression hits companies like BPCL and HPCL particularly hard when crude prices spike suddenly. Gas distributors face similar challenges, though GAIL's infrastructure assets and city gas companies' consumption growth provide some long-term value despite their inability to immediately pass through cost increases. Upstream producers offer direct commodity exposure but face renewable transition questions.

For now, the market is pricing in a relatively contained conflict. 

Oil prices, while up sharply, remain well below the $130+ levels some analysts warn could emerge if the Strait of Hormuz faces serious disruption. The smart money seems to be positioning for higher fossil fuel prices while hedging geopolitical risk. That suggests upstream producers like ONGC and Oil India for immediate commodity exposure, with Oil India offering potentially higher upside given its exploration focus and smaller market cap.

Coal India presents an intriguing substitution case study. While coal prices haven't moved dramatically, sustained high oil and gas prices could drive Indian utilities back toward domestic coal for power generation. The company's dominant position in domestic coal production would benefit from any structural shift away from expensive imported energy, making it an overlooked energy security play.

Renewable energy companies such as Adani Green should see traction as the longer-term transition story.

West Asia has always been volatile, but the difference now is how quickly energy security has moved from abstract policy concern to immediate market reality for Indian fossil fuel investors.