India could see real growth in oil demand next year

Next year is expected to be a turnaround for oil demand in India, according to a new study by S&P Global Platts Analytics.

With weakened demand caused by an economic slowdown, a slump in new vehicle sales, and flooding during monsoon season, the growth number is expected to come in at a meagre 120,000 b/d in 2019. S&P Global Platts expects India's oil demand to grow by 170,000 b/d next year.

Economic growth is expected to pick up next year, as the Reserve Bank of India is cutting interest rates, which is also expected to support oil demand. Diesel has been hardest hit by the slowdown, prompting refiners to search for buyers of their surplus supply in overseas markets.

Other big moves are in store. The government plans on moving ahead with introducing Euro 6 equivalent fuels, launching a gas exchange, and selling a majority stake in one of India's leading state refiners, Bharat Petroleum Corp Ltd.

The expectation that the country’s oil demand will grow by 120,000 b/d this year would be the weakest pace of growth since 2013. It's far below the average of 200,000 b/d seen over 2011-2018, according to Platts Analytics.

Consumption of diesel in India rose only 1.8 percent year on year over January-September, according to data from the Petroleum Planning and Analysis Cell.

"Macroeconomic factors are weighing more on diesel as it is dependent on the manufacturing and industrial sector," said Senthil Kumaran, consultant at Facts Global Energy. "Higher-than-normal monsoon rains in 2019 further exacerbated the situation. But we think the story for gasoil (diesel) is not over yet. We expect a gradual recovery in diesel consumption in the next six months.”

Kumaran sees liquefied petroleum gas (LPG), which could come to market in the form of propane or butane, seeing robust growth, and jet fuel seeing a rebound as India’s economy improves. FGE expects an even higher overall oil products demand growth next year — at 180,000 b/d versus Platts Analytics at 170,000 b/d — and that comes from an overall daily oil consumption estimated around nearly 5 million bbb/day.

Lim Jit Yang, adviser for oil markets at S&P Global Platts Analytics, says that the pressure to meet the International Maritime Organization's 2020 clean shipping fuel deadline could push up energy costs. Another factor to consider is expanding trade current account deficit could put pressure on India’s currency and could potentially keep interest rates higher than desired.

"Motorists are also expected to pay a quality premium for their transport fuel with new Euro 6-equivalent fuel from April. In effect, Indian consumers will suffer from a double whammy of higher fuel prices, which could dampen oil demand, especially in H1 2020, before a potential improvement in H2," Lim said.

India is well in the third position globally behind the US and China in daily oil consumption, and is and about a million barrels per day ahead of Japan and Saudi Arabia according to a BP market study on 2018 global oil supply. India could very well close much of the gap with the US and China over the next decade with the world’s largest population, expected economic growth, and a burgeoning auto industry.

As for now, oil analysts are steadily watching what happens in China — if its economy can go back on track to growth. India faces many of the same economic and energy issues, and is expected to follow China, though at a much slower rate than had been seen over the previous decade for both countries.

Like many governments in Europe, North America, and Asia, India had made overly ambitious promises to reduce its dependence on oil imports and to convert over to non-petroleum fuels in transportation.

“The idea is that by 2030, not a single petrol or diesel car should be sold in the country,” India’s coal and mines minister Piyush Goyal said in 2017. “We are going to introduce electric vehicles in a very big way.”

Goyal said the government was ready to subsidize the development and sale of electric cars and to help Indian companies install electric charging infrastructure. While India has followed through on some of these incentives and mandates, its electric vehicle sales remain a very small percentage of its total new vehicle sales.

India’s national government based in New Delhi aims to strike a balance between fighting an environmental battle and preparing for robust growth in energy demand, according to the S&P Global Platts Analytics study.

This article was originally published on Oilprice.com