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Diesel tightness remains key catalyst in coming quarters

* Crude exports recover, diesel continues to lag: Gulf crude exports have recovered to ~14mb/d in Sep’26 (75% of pre-war levels), but Middle East refined product exports are still down ~50%. Diesel tightness is accentuated by: 1) ~30% YoY decline in Russian refinery throughput, 2) tight jet fuel markets pulling yields away from gasoil, and 3) restricted access of Asian refiners to preferred crudes limiting gasoil yields. While higher refinery output could create a surplus in 1QCY27 (per IEA), it is unlikely to offset the deficit accumulated in CY26, keeping diesel cracks elevated till 2HCY27. In this note, we highlight that strong O2C performance in 2QFY27 was not a one-quarter phenomenon but could continue till 2HCY27.

* Twin benefits of access to cheap crude; high diesel yields work for RIL: Complex refiners such as RIL with access to discounted crude grades and high diesel yields are best placed to take advantage of high diesel GRMs in next few months. RIL has access to both Russian and Venezuelan crude (Merey: USD16/bbl discount vs. Urals: USD10/bbl premium). Replacing Russian crude with Venezuelan crude, even partly, adds up to USD2/bbl to RIL’s GRM, which is not reflected in our estimates currently and can be a key upside risk in FY28. Following a strong 2Q standalone performance and continued strength in product cracks/petchem prices, we recently raised our FY27/FY28 standalone EBITDA estimates by 13%/7%, primarily driven by an upgrade to our refining and upstream assumptions.

* At CMP, stock factoring in 30% holdco discount; reiterate BUY: RIL’s stock price is down 10% over the last six months and at CMP, it is factoring in a 30% holdco discount, based on 20x Sep’28E EV/EBITDA for Retail (vs. our ascribed ~28x). While investors who invested in RIL for its digital services will now have an option to gain direct exposure through Jio Platforms (JPL), RIL will remain a play on India’s largest retailer, largest integrated energy company, and several other growth optionality (such as New Energy, data center, AI, and FMCG). Further earnings upgrade on the back of stronger refining/petchem cycle, recovery in retail revenue growth and profitability remains the key medium-term trigger for the stock.

Crude supply recovers significantly, but diesel remains in short supply

* Gulf crude exports rose 4.4mb/d to 13.9mb/d in Sep’26, over 75% of prewar levels, but Middle East refined product exports are still below half of pre-war levels (1.9mb/d against 4.7mb/d). Diesel, therefore, stays short even as crude supply heals.

* Four supply factors drive the gap:

1. Asian refinery run cuts: Disruptions to crude flows through the Strait of Hormuz weighed on refinery runs in 2QCY26, curtailing gasoil production, particularly in China, India and South Korea.

2. Russian refinery disruptions deepen global gasoil supply constraints: Ukrainian drone strikes on Russian refineries have sharply curtailed gasoil production and exports. Easing of export restrictions is unlikely to materially improve supplies, as the binding constraint remains damaged and unavailable refinery capacity.

3. Jet fuel prioritization: Tight jet fuel markets over the summer incentivized refiners to maximize kerosene output, diverting middle-distillate yields away from gasoil and further tightening diesel availability.

4. Suboptimal crude slate: Restricted access to preferred crude grades forced refiners to process less-suitable feedstocks, impairing refining efficiency and limiting gasoil yields.

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