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Developments over the past week:

* The oil market is increasingly pricing in a prolonged disruption to Middle East supply flows, as uncertainty around US–Iran negotiations persists and tanker movements through the Strait of Hormuz remain constrained. Brent rose 2.4% on August 20 to USD93.78/bbl, its highest level since July 24. The focus has consequently shifted from the immediate supply impact to how long the disruption could last. A sustained reduction in Gulf exports could tighten global balances, particularly if inventories continue to fall, keeping a sizeable geopolitical premium embedded in crude prices.

* The supply disruption is increasingly being felt in refined products rather than crude, with diesel emerging as the most constrained segment. US distillate inventories fell 1.5 million barrels to 105.6 million barrels, around 13% below the five-year seasonal average, despite refinery utilisation reaching 97.2%. US diesel exports also reached around 1.9mb/d in early August, as international buyers competed for limited supplies. This combination of strong refinery runs and declining inventories highlights the severity of the product squeeze, supporting gasoil cracks and refining margins.

* China is redirecting more of its crude purchases towards Russian barrels, increasing competition with Indian refiners for discounted supplies. Chinese seaborne imports of Russian crude are estimated at around 1.25mb/d in August, while India’s Russian crude intake has dropped to 1.87mb/d, from more than 2.7mb/d during June-July.

In our opinion:

* Oil markets are transitioning from a crude-supply shock to a broader product tightness cycle. We expect elevated gasoil cracks and refining margins to persist as constrained Gulf exports, refinery outages and low inventories limit product availability. This should provide a strong earnings tailwind for CPCL and MRPL. We have BUY rating on both with target prices of INR 1,540/share and INR 215/share, respectively.

* China’s rising Russian crude intake is not merely a substitution trade; it could reshape Asia’s marginal crude economics. If this persists, India may increasingly compete for Atlantic Basin barrels, which ultimately put upward pressure on oil prices. However, this increase in oil prices would push distillate price further up, provided the Strait remains blocked and as explained in our Refinery Thematic report.

* We now expect Brent prices to average at USD86/b during the quarter from our previous estimate of USD85/b. Meanwhile, we raise our Q3FY27 estimate from USD72/b to USD75/b. The increase is attributed continued disruption to production in Middle, aggressive return of Chinese demand in oil markets, broader absorption of 400 million barrels of IEA release and US inventory at bare operational levels.

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