Page 7 - Policy Economic Report- June'26

POLICY AND ECONOMIC REPORT
OIL & GAS MARKET

Impact of economic factors on Oil & Gas sector in India

Domestic Production Trends

• The continued decline in domestic crude oil and natural gas production remains one of the key
structural challenges facing India's oil and gas sector. According to Index of Eight Core Industries
(ICI), during May 2026, crude oil production contracted by 4.6% year-on-year, while natural gas
production declined by 4.9%, reflecting persistent weaknesses in the upstream segment.

The sustained decline in domestic hydrocarbon production has significant implications for India's
energy security. As domestic output fails to keep pace with growing energy demand, the country
becomes increasingly reliant on imported crude oil. The crude oil imports rose by 1.41% in May
2026 as against the same period last year. Higher import dependence exposes the sector to global
crude oil price volatility, exchange rate fluctuations, and geopolitical disruptions affecting
international energy supplies. It also increases India's energy import bill (crude oil imports
amounted to USD 18.7 bn in May 2026 as against USD 10.3 bn in May 2025) and widens the
merchandise trade deficit during periods of elevated international oil prices.

Industry Component Weight in ICI May 2026 Growth (YoY)

Petroleum Refinery Products 28.04% -8.7%

Crude Oil 8.98% -4.6%
Natural Gas 6.88% -4.9%
Total Oil & Gas Sector 43.90% Overall contraction

• In addition to lower upstream production, petroleum refinery output declined sharply by 8.7% in
May 2026, with cumulative refinery production also contracting by 4.7% during April–May FY
2026–27. The decline in refinery production has affected the availability of petroleum products
domestically, including year-on-year decline in production for May 2026 of petrol (-7.14%), diesel
(-4.9%), ATF (-20%), and bitumen (-0.6%), and potentially also reducing export volumes. The
petroleum exports declined from 5.6 MMT in May 2025 to 3.7 MMT in May 2026.

Impact of External sector developments on oil & gas sector

1. Higher foreign exchange reserves strengthen energy security - India's foreign exchange reserves
of nearly US$704 billion provide a strong buffer for financing crude oil and LNG imports, which
account for a significant share of the country's import bill. These robust reserves:
• Reduce external vulnerability arising from oil price shocks.

• Support exchange rate stability, limiting the impact of rupee depreciation on crude import
costs.

• Enhance investor confidence in the energy sector by improving macroeconomic stability.

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