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15 Apr, 2021 07:16

India’s oil demand recovery threatened by new restrictions

India’s oil demand recovery threatened by new restrictions

As the summer months draw nearer, usually meaning a rise in oil demand for India, increased pandemic restrictions threaten this trend in the world’s third-largest oil importer.

According to a Bloomberg article, fuel consumption in India remains lower than it was before the pandemic, with oil demand in 2020 dropping to its lowest level since 2007. As Mumbai and the larger Maharashtra state enforce another round of restrictions, including a city-wide curfew during weekends, the reduction in traffic suggests a likely dip in the demand for fuel in the coming weeks.

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Diesel consumption, used for trucks, farms, and factories across the country, accounts for 40% of India’s oil product sales. In March, diesel consumption was down 3% from 2019 levels and could drop significantly further if restrictions continue. The industry consultant FGE believes diesel demand will average 1.72 million bpd in the first six months of 2021, and could then drop to 1.71 million bpd later in the year.

Just a few weeks ago, experts were hopeful for a demand recovery in India as the sector seemed to be stabilizing. However, new restrictions and the unknown nature of a ‘second wave’ of Covid-19 infections will likely threaten this recovery prediction in the short term. 

Since greater restrictions have been introduced in cities across India, unemployment has already begun to rise, up 6.7% for the week ending April 11 compared to two weeks earlier. From media coverage, it appears as though many are rushing away from the city to smaller towns and villages as they worry about a repeat of last year’s restrictions where many were trapped without transport having lost their job and income. 

While many are hopeful for India’s future impact on the oil industry, as its population continues to grow, 2020 was a difficult year for the huge Asian country. Demand for petroleum products, including diesel, gasoline, and jet fuel, fell 10.8% between 2019 and 2020; the first annual decrease in 20 years.

Yet, India climbed to become the largest purchaser of US crude oil in the first quarter of 2021, after being the second-largest buyer in 2020 at a rate of around 287,000 bpd, roughly 26% more than in 2019.

India’s preference for US oil is due to the government’s inability to sway Saudi Arabia’s decision to limit production. Saudi Arabia kept its agreement with OPEC+ to curb production levels until oil prices stabilized, before gradually ramping up production over the coming months.

The Indian government has therefore been looking to diversify its oil imports to regional players. For example, India is expected to resume buying crude oil from Iran as soon as US sanctions are lifted, after stopping its purchase of Iranian oil in mid-2019.

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Indian refiners are thought to have already begun preparatory work to enter into contracts with Iran as soon as possible. An Indian official stated, "We already have a template for commercial terms and we can very quickly enter into contracts the moment Iran is cleared for exporting oil."

Diversifying its imports to regional players and the US will help to reduce its reliance on Middle Eastern oil giants Saudi Arabia and the UAE. This will allow India to obtain more competitive prices and better manage its energy security.

While in the short-term increased restrictions look set to hinder India’s anticipated oil demand increase, mechanisms are in place to ensure that the country can diversify its oil imports to meet its oil needs as soon as restrictions ease.

This article was originally published on Oilprice.com