Record oil prices and reports that the government may divert diesel exports to the domestic market saw the oil and gas sector post the largest decline among the sectoral indices at the Bombay Stock Exchange on Friday.

The oil and gas index fell 4.71 per cent led by index heavyweight Reliance Industries [Get Quote], which was down 5.19 per cent to Rs 2,527.65. Essar Oil [Get Quote] declined 9.45 per cent to Rs 257.15. Both these companies operate export-oriented refineries in Gujarat.

Meanwhile, crude oil on Friday touched a new high of $125.98 per barrel. With this, crude prices have more than doubled from January last year.

The Indian basket of crude was also at a new high of $117.83 on Thursday, the latest day for which data are available.

The domestic supply of diesel has been constrained on rapidly growing demand. The diversion of supplies from Reliance Industries, which was given export-oriented unit status last year, has added to the shortage.  Reliance produces 10 million tonnes of diesel from Jamnagar.

Selling diesel in the domestic market would lead to an imposition of import duty and cess under EoU norms. An oil ministry official said no decision has been taken on a proposal to waive these duties.

Meanwhile, the first signs of a shortage of diesel are being seen in the northern states.

"For the last month, petrol pump dealers, particularly of the Bharat Petroleum  Corporation, have been facing supply shortage," said Ajay Bansal,  general secretary of the Federation of All India Petroleum Traders.

Bansal said it takes almost two days for BPCL [Get Quote] to send diesel supplies to petrol pumps from their depots, which used to take only two hours a month ago. "Some pumps are going dry for almost one whole day," Bansal said.

A top BPCL official confirmed a supply shortage in north India.

Demand has been rising as a result of more vehicles running on diesel (almost 50 to70 per cent of mid-sized passenger cars; it was minuscule last year) and many industries using cheaper diesel as fuel rather than naphtha and fuel oil.

Cash constraints of the oil marketing companies � that sell petrol, diesel, LPG and kerosene at subsidised prices � and inadequate import infrastructure are adding to the supply constriction of diesel, say industry officials.

"The fact is that we do not have the money to pay for the imports. At some point of time, our pumps could run dry," said an official with IOC, the country's largest crude oil refiner and marketer of petroleum products.