Oil & Gas – Sector Update – Demand destruction in the making?

The ongoing conflict in West Asia has tightened global oil supply, driving prices higher and increasing volatility. While disruptions are broad-based, the US and China remain relatively insulated in the near term, supported by production of >13mbpd, crude inventories of ~870.8mb, and elevated product stocks (gasoline ~228.4mb; jet fuel ~43.7mb as of 17 Apr’26) in US. China benefits from strong imports (~146.9mmt in Jan–Mar’26) and sustained stock addition (~165mmt since 2021), alongside tighter product export controls. Strategic release of ~400mb by IEA and alternative export routes bypassing the Hormuz (~6.2 mbpd) offset the supply loss of 15mbpd crude oil from the Hormuz partially, leaving an imbalance of ~4.8mbpd, which is expected to be absorbed via demand destruction. Higher prices are already weighing on demand, with early signs of slowdown. IEA expects global oil demand to contract by a sharp ~1.5mbpd decline in 2Q26, with ~2.3mbpd in Apr’26 vs industry estimate of ~4.0mbpd. Against a supply balance of ~4.8mbpd, such expected demand destruction will partially rebalance market dynamics further, putting a downward pressure on crude prices. If demand absorption of the residual imbalance materializes, crude prices are likely to soften from elevated levels. Based on this, we revise our target multiples for IOCL/BPCL/HPCL to 0.9x/1.3x/1.1x (earlier 0.8x/1.2x/1.0x), resulting in revised target prices of INR163/332/421. We revise HPCL’s rating to “Accumulate” from “Buy” and maintain “Accumulate” on BPCL/IOCL.