India’s grim record-setting COVID wave shows the market that the expected rebound in global oil demand this year may not be a straight line up.
The world’s third-largest oil importer has seen fuel demand decline in recent weeks as record-high new coronavirus infections prompt lockdowns and curfews in many states in the country of 1.3 billion residents, limiting mobility and slowing business activity.
India’s demand for diesel, gasoline, and jet fuel is expected to further decline in the coming weeks, with no sign that the health crisis will be brought under control anytime soon. Indian crude oil imports—at around 4.6 million barrels per day (bpd)—are still holding steady, but they could start dropping later this quarter and at the beginning of the third quarter, undermining the recovery in oil demand led by the U.S. and China, analysts say.
The recovery in Indian fuel demand earlier this year gave oil bulls hope that the OPEC+ decision from April 1 to ease the group’s production cuts by over 1 million bpd over May-July is the right call for bringing balance to an increasingly tight oil market this summer.
But the latest fuel demand data from India suggest that the ‘strong oil demand rebound’ narrative could have undermined the impact of the second wave in one of the most important oil markets in the world.
The impact of India’s COVID resurgence is unlikely to be as devastating as last year’s 60-percent crash in fuel demand amid a nationwide lockdown. This year, no country-wide lockdown has been declared, although many states and major cities have imposed restrictions.
But those limits on mobility were immediately felt in India’s demand for fuel. The recovery from last year’s lockdown was attributed mostly to Indians preferring driving their own vehicles—almost all running on diesel and gasoline—to using public transportation. With mobility now restricted again, consumption of diesel, gasoline, and jet fuel is falling.
India’s combined demand for diesel, the most used fuel in the country, and for gasoline is set to plunge by as much as 20 percent in April compared to March, officials from refiners and fuel retailers told Bloomberg.
Refiners in India have already cut capacity utilization to 94-95 percent from 100 percent as the lockdowns lead to fewer sales of gasoline and diesel.
“We have cut the capacity marginally at present and are observing the situation. In case the cases continue to rise, and states extend lockdowns and curfews, we will have to review the situation,” a senior official with an oil marketing firm told Mint this week.
“Refining and marketing companies are cutting down on capacity utilisation although the demand slowdown is not as severe as April 2020,” Sabyasachi Majumdar, Group Head & Senior Vice President at investment information and credit rating agency ICRA, said on Monday.
The lockdowns in recent weeks have already dampened sales of auto fuels and jet fuel, ICRA said, not ruling out the possibility of consumption worsening going forward.
Business activity in India is also suffering from the COVID wave. According to brokerage Nomura, cited by The Economic Times, business activity saw in the week to April 25 its steepest weekly decline in more than a year.
This marked slowdown in activity and fuel consumption has not yet translated into significantly lower crude oil imports.
“India’s crude oil imports are so far keeping pace with seasonal norms but a fresh surge in coronavirus cases prompting new lockdowns could hit fuel demand and temper crude buying,” Fotios Katsoulas, Liquid Bulk Principal Analyst, Maritime & Trade at IHS Markit, wrote last week.
According to Refinitiv Oil Research, cited by Reuters, India’s crude imports in April would be around 3.59 million bpd, down from 4.22 million bpd in March.
The lower imports in April would be the result of India’s frustration with OPEC+ decisions about what India says are “artificial cuts to keep the price going up.” Arrivals in April must have been contracted in February when oil prices were rising.
However, if India’s COVID surge is not brought under control soon, the country’s oil imports in June and July could further drop, not only because of oil above $65, but also because fuel demand is set for at least a few more weeks of declines. While apprehensive about India’s near-term demand, the market, as well as OPEC+, seem confident that the expected oil consumption rebound in the U.S., China, and parts of Europe would offset the slowdown in India.
By Tsvetana Paraskova for Oilprice.com
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