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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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World’s Third-Largest Oil Importer Sees Rebound In Demand

India's crude oil demand has been on the mend since mid-summer. It is likely to continue along this same vein for quite a while, with at least one refiner planning to boost refining capacity considerably.

India, the world's third-largest oil importer, has become a key factor for oil prices because of its overwhelming dependence on imported crude. During the latest wave of Covid-19 infections in the country, oil demand suffered an expected slump. But now things are looking up.

Reuters reported last month that in July, Indian refiners increased run rates to the highest in three months in response to strong fuel demand that followed the relaxation of movement restrictions after the worst of the wave. The outlook for demand remains upbeat, too. Gasoline demand in the country is expected to hit a record high during the current fiscal year because of the pandemic. As in other places, people in India are shunning public transport in favor of personal vehicles to reduce their risk of infection.

Sales of passenger vehicles in India soared by as much as 45 percent on the year in July, according to a Reuters report from earlier this month. The report attributed the boom to pent-up demand. Still, it must have also had something to do with the shift to personal transportation at the expense of public transportation.

The resulting surge in gasoline demand could be so strong as to require additional imports, an industry insider from a state-owned refiner told Reuters. Boosting local gasoline production was not an option because Indian refiners were drowning in unsold diesel and had no space for throughput increases until these inventories went down.

The diesel problem is not confined to India, by the way. Asian refiners are struggling with an inventory overhang seen at 600,000 bpd as of August, per a recent Bloomberg report. Despite lower diesel exports from China, margins for the fuel remain slim, the report said, quoting an Energy Aspects analyst, and prices remain subdued, which is "really telling of how bearish the situation is."

Yet gasoline demand is booming, and refiners are planning capacity increases for the coming years. Indian Oil Corp., for instance, said in August that it planned to boost its refining capacity by 25 percent, or 350,000 bpd, over the next four years. This will bring the total to 1.76 million bpd, Argus reported last month.

The IOC expansion is part of a bigger plan to expand India's oil refining capacity to 6 million bpd in 2025 from 5 million bpd, Argus also reported, citing a junior oil minister. The combined investment in the expansion would come in at $27 billion, the official said.

"Forecasts by various agencies see Indian fuel demand climbing to 400-450 million tonne by 2040 from the present 250 million tonne. This offers enough legroom for all forms of energy to co-exist," IOC's chairman, Shrikant Madhav Vaidya, told Indian media in late August. Demand is already back to pre-pandemic levels, the executive noted.

This fast rebound in oil demand after India became the epicenter of one of the worst infection waves since the start of the coronavirus pandemic suggests it might gain even more importance as a key export market for big oil producers. The suggestion is supported by Saudi Arabia's recent price cut for Asian clients.

On the one hand, the cut could be interpreted as a response to sluggish demand recovery trends in the continent. On the other, however, based on the latest data from India, it may be an attempt to boost market share in one of the biggest consumers of oil, whose thirst for the fossil fuel most expect to continue growing in the coming years and decades.

By Irina Slav for Oilprice.com

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