India has been added to a “red list” of countries from which most travel to the UK is banned, over fears of a new coronavirus variant. Oil traders, in a sense, should also put the third largest crude importer on red alert, given the likely squeeze on energy demand among its 1.4 billion people.
To be sure, oil prices aren’t going to crash tomorrow even with India’s leading cities including the capital, New Delhi, going into lockdown from a resurgence of the pandemic. Global demand for crude is still assured with top consumer China making a roaring comeback as its economy recovers, while the United States leads the global vaccine drive and Europe tries to catch up with its own immunization.
Indian demand, however, remains important to oil for one reason: The country is the single largest, growing market for energy, other than China.
John Kilduff, partner at New York energy hedge fund Again Capital said:
“Even in an ordinarily-performing market, it takes considerable effort to offset demand dislocations in one region. In a pandemic, the complications take on a different dimension altogether. If not for demand itself, often the psychological impact is enough to wear the market down.”
The Paris-based IEA, or International Energy Agency, in a report published in February, highlighted the importance of India to the global oil economy.
The IEA said India is set to witness the biggest increase in energy demand in the world over the next two decades, with the potential for oil consumption rising as much as 4 million barrels daily to 8.7 million by 2040, under one scenario.
Even with a stronger push for electrification, efficiency and fuel switching, India’s demand growth for oil should be at just under 1.0 million barrels daily over the same period, the IEA said.
Domestic production of oil and gas continues to fall behind consumption trends, and net dependence on imported oil could potentially be above 90% by 2040, up from 75% today, the agency pointed out, noting continued reliance on imported fuels creates vulnerabilities to price cycles and volatility, as well as possible disruptions to supply.
S&P Global Platts said in a February report that comments similar to those expressed by the IEA emerged at the South Asia Commodities Virtual Forum it hosted that month. Speakers at that forum said India's peak oil demand would come much later than the rest of the world might anticipate, creating enough room to pursue refinery expansions and secure crude supplies through diversification drives.
Unabashedly Reliant On Oil
India is unabashedly reliant on oil and is a key buyer of crude from big suppliers like Saudi Arabia and Iraq, while the OPEC producers equally depend on India's appetite for Middle East grades. The relationship is mutually beneficial, and the ties between India and top producers are only getting closer.
Middle East oil producers are eyeing projects in India that would help them expand their footprint in the country. Although delayed, the plan for a 1.2 million barrels daily mega-refinery joint venture between Indian state refiners and Saudi Arabia's state-owned behemoth Saudi Aramco (SE:2222) and the United Arab Emirates' national oil company ADNOC are still in place.
A potential Aramco joint venture with Reliance Industries (NS:RELI) could get back on track in 2021. Reliance has received clearance to raise the export capacity of its export-focused Jamnagar refinery by 17% to 820,000 barrels daily and aims to hit close to 2 million by the end of the decade. With a guaranteed supply of heavy sour Saudi crude into the plant, it would be a win-win.
India's own appetite for road fuel, namely diesel and gasoline, is set to come roaring back. S&P Global Global Platts Analytics sees the economy growing 9.3% this year after contracting 7.7% in 2020, as vaccines help return life closer to normal and a $35 billion package designed to improve employment and industry provides a timely boost.
Platts Analytics expects India's oil demand in 2021 to recover to the level of 2019, with growth of 470,000 barrels daily in the year, after declining 470,000 in 2020.
Platts says diesel demand will be the biggest driver as the energy-intensive industrial sector recovers quicker, assisted by a rebound in the commercial vehicle segment.
With diesel accounting for about 40% India's oil products basket, the demand recovery has already provided enough reason for all state-run and private refiners to lift operating rates to around 100% capacity.
Gasoline output, a notable sidekick to diesel in India, has also shown strong signs of life, climbing to a 14-month high in December.
Jet fuel will remain the laggard. Airlines in India are likely to continue to function well below capacity, especially for international flights, which are currently 60% below pre-pandemic levels.
A Ticking COVID Time-Bomb
In the near-term though, India is a ticking COVID time-bomb, with its exposure to the pandemic potentially as dangerous as that once faced by China and Italy.
As the Washington Post observed, the spike in infections in India is so steep that the increase looks almost vertical—infecting entire families and overwhelming hospitals.
In Delhi, India’s worst-affected city, the health care system has “reached its limit” and could collapse if action is not taken, said Arvind Kejriwal, a top official. On Monday, the city announced a six-day lockdown to stem galloping infections.
The ferocity of India’s second COVID wave now accounts for about one in three of all new cases.
World Health Organization chief Tedros Adhanom Ghebreyesus noted on Friday that India’s “cases and deaths are continuing to increase at worrying rates.”
India is adding more than 250,000 new infections a day—and if current trends continue, that figure could soar to 500,000 within a month, said Bhramar Mukherjee, a biostatistician at the University of Michigan.
As The Post noted, it wasn’t supposed to happen like this. Earlier this year, India appeared to be weathering the COVID-19 pandemic. The number of daily cases dropped below 10,000 and the government launched a vaccination drive powered by locally made vaccines.
But experts say that changes in behavior and the influence of new variants have combined to produce a tidal wave of new cases.
“Deaths per day are at record highs and climbing. In some cities, crematoriums are running their furnaces around-the-clock,” The Post’s New Delhi bureau reported.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.