Iran conflict drives oil rally, dragging Indian refiners and rupee lower

Indian refiners fell on Monday as a widening US-Israeli war with Iran pushed Brent crude to a nearly four-year high, raising concerns over near-term earnings and the possibility of further government intervention.

State-run Indian Oil dipped 4.6%, Hindustan Petroleum slid 4.9% and Bharat Petroleum dropped 5.4%, with BPCL heading for its steepest fall since June 2024.

The sell-off dragged the Nifty oil and gas index down 2.7% and the energy index 2.1% lower, while the benchmark Nifty 50 slid 2.8%. The oil and gas index has fallen 6.6% since the U.S.-Israeli strike on Iran last week.

India’s top refiner Reliance Industries was down 0.4% after slipping 2.5% earlier.

UBS said Indian oil marketing companies are exposed to the crude spike because their fuel sales far exceed their production — roughly double for IOC and BPCL, and even more for HPCL.

The brokerage downgraded IOC and BPCL to “neutral” and HPCL to “sell” from “buy”.

It also reduced fiscal 2027 profit estimates by 19% for IOC, 15% for BPCL and 46% for HPCL.

Oil surge raises supply concerns

Oil prices surged about 26% to $119.5 per barrel — the highest since July 2022 — as some major producers cut supplies and fears of prolonged shipping disruptions gripped the market.

Iraq and Kuwait have begun reducing oil output, adding to earlier liquefied natural gas (LNG) cuts from Qatar as the war disrupted shipments out of the Middle East.

Citi said refiners’ earnings will depend on how long the geopolitical shock persists, warning of risks if the Strait of Hormuz closes or if Qatar’s LNG output is disrupted. Each supplies roughly half of India’s crude and LNG needs.

India, the world’s second-biggest importer of LPG, consumed 33.15 million metric tons of the cooking gas last year, with imports meeting about two-thirds of demand. Middle Eastern suppliers account for 85%-90% of India’s LPG inflows.

New Delhi on Friday invoked emergency powers directing refiners to maximise liquefied petroleum gas production to prevent a cooking-gas shortage following supply disruptions.

Citi said prolonged turmoil could force further government intervention, including export curbs, duties on refined products or direct budgetary support.

Indian companies also raised LPG prices for the first time in about a year on Friday, tracking global benchmarks as the war disrupted flows from the Middle East.

India imports more than 80% of its crude oil needs and is the world’s third-largest oil importer.

Rupee hits record low despite RBI intervention

The surge in oil prices also pushed the Indian rupee to an all-time low on Monday, even as the central bank intervened before the open and again after trading began.

Following the Reserve Bank of India’s pre-market intervention, the rupee opened at 92.1975 per U.S. dollar, higher than the levels indicated by the non-deliverable forward market.

The relief was brief as the currency faced continuous dollar-buying pressure, pushing the rupee to a fresh lifetime low of 92.33.

The fall came as oil prices climbed sharply. Brent crude rose more than 25% to about $117 a barrel on Monday, extending last week’s rally.

Oil prices are now up more than 50% since the outbreak of the U.S.-Israeli war on Iran, prompting a broad risk-off shift in markets and pushing investors towards the safe-haven dollar.

India’s dependence on imported crude increases its import bill and raises dollar demand from refiners, leaving the rupee among the most vulnerable emerging-market currencies when oil prices surge.

“In the event the conflict is more protracted, the risk is that EM currencies more exposed to oil, INR and PHP, will face further selling pressure,” BofA Global Research said in a note.

The RBI’s pre-market intervention repeated the strategy it deployed last Thursday and has used several times in recent months.

Bankers said the latest intervention was mainly aimed at limiting losses in the rupee, while last Thursday’s action was intended to push the dollar/rupee pair lower.

“The message from the RBI seemed to be that it is present and watching the market. With oil prices doing what they are, it’s difficult for the central bank to actually push dollar/rupee lower,” a currency trader at a bank said.

(With inputs from Reuters)