- China’s oil demand growth is expected to slow down, while India’s should accelerate in the coming years.
- India’s fuel consumption hit a new record in March, largely due to increased bitumen demand for infrastructure development.
- Here are the main takeaways for oil traders
Many banks and agencies predicted that oil prices would hit triple digits this summer because they believed oil demand in developing countries like China and India would surge during the first half of 2023.
China’s demand has increased since the end of its zero-COVID policies, but not as much or as quickly as many expected. On the other hand, India’s oil demand has increased rapidly this year. In March, India reached a new record for fuel consumption, which is considered a stand-in for oil demand.
Some analysts predict that within the next ten years, India will become the world’s primary source of oil demand growth. Right now, China accounts for nearly 50% of global oil demand growth, but China’s oil demand should grow less rapidly in coming years, while the pace of India’s oil demand growth is expected to accelerate.
I have explored the sources of future oil demand growth in India in previous columns. It is easy to see why India is expected to become a major source of global oil demand growth over the next decade. However, that doesn’t necessarily mean India’s oil demand will surge this year. India’s fuel consumption has been high this year, but it hit 4.83 million bpd in March largely because the demand for bitumen was significantly higher than normal.
Bitumen is a very lightly refined petroleum product used for asphalt in the construction of roads. Consumption of fuels like diesel, gasoline, and jet fuel was also strong but did not increase nearly as much as bitumen consumption did.
The outsize jump in bitumen demand is likely linked to increased spending on infrastructure by the Indian government. This means that this acceleration in oil demand growth will likely only last as long as the Indian government continues spending money on infrastructure development. It also means that the higher demand is subject to fluctuations in the construction industry.
For example, monsoon season is approaching, and construction tends to slow down to stop during those months. Traders should be aware of the tenuousness of double-digit demand growth in the short term in India and that if the government runs out of money or the ruling party decides that it doesn’t need to spend as much money after the upcoming elections, India’s demand growth could slow down.
However, traders should also be aware that multiple provinces in China are preparing to launch major development programs designed to spur economic growth. According to Bloomberg, more than half of China’s regional governments recently announced they would be spending money on major infrastructure programs like transportation, electricity generation, and new industrial hubs this year.
If these plans are put into action, government spending could increase by as much as 17% from last year. According to an analysis from Wood Mackenzie, this kind of increase in construction could increase China’s oil demand by 1.4 million bpd in the year.
When considering how government-sponsored construction is likely to impact oil demand growth from developing countries like China and India, it is important for traders to also consider the type of government in place.
China’s centrally managed communist political system means that China is more likely to follow through with announced construction projects than India, which has a democratic political system. The election of a new government in India could bring an end to infrastructure spending, so traders should expect more volatile oil demand growth from India.
Disclaimer: The author does not own any of the securities mentioned in this article.