By Radha Dhar
In 2016, fuel demand in Indiathe worlds third largest consumer of oil, following China and the USwas at a 16 year high. Enter demonetisation. Suddenly, the tables have turned and demand for oil has slumped to its lowest in over a decade. These consecutive extremes have left the global markets shuddering and wondering about how far the ripples of demonetisation will be felt. If trends follow expert predictions, such as those of Reuters, the dip in demand reaching a trough of almost 40% lower than last years record heights, may still dip further in 2017.
India’s oil demand has plummeted due to demonetisation | Photo Courtesy: World Travel ServerThe barrel-by-barrel breakdown
[su_pullquote align=”right”]The inaccessibility to cash and a general mass hesitancy to purchase impacted the fuel market heavily.[/su_pullquote]
As investment, supply, and consumption of oil in India was at a peak last year, the cost to consumers was low and demand grew as a result, literally fuelling the cycle. Indias Prime Minister, Narendra Modis, surprise tactic of selective currency invalidation in retaliation to the “black money” market, announced in November 2016, has left the average Indian consumer short of common rupee notes. The immediate inaccessibility to cash and a general mass hesitancy to purchase impacted the small cash-reliant markets heavilythe fuel market taking one of the hardest hits.
Since then, the trend has continued in a downward spiral for petroleum, gasoline, diesel, and aviation fuel. Diesel consumption has dropped by a staggering 7.8%, according to reports revealed by the Indian governments Ministry of Petroleum & Natural Gas. Diesel makes up 40% of total fuel product demand in India. Moreover, leading energy consulting firm, Wood Mackenzie, has predicted that India’s demand for oil products will drop even further, from 270,000 barrels per day (bpd) in 2016 to a surprising 160,000 bpd in 2017.
Major oil suppliers await a comeback
India imports around 80% of its crude oil. The International Energy Agency also predicts that it will be the fastest-growing oil consumer through to 2040. State-owned refiners like Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL), and Hindustan Petroleum Corp Ltd., (HPCL) are major buyers of Nigerian crude dealers such as Qua Iboe, Bonny Light, Escravos, and EA Blend. Other veteran global suppliers like Iran, Kuwait, and Saudi Arabia watch on with caution while India continues to iron out the wrinkles in a move that caught consumers off-guard.
[su_pullquote]OPEC holds high hopes for and great stake in India.[/su_pullquote]
All this comes at a critical time when the Organization of the Petroleum Exporting Countries (OPEC) is set to meet and review its global goals. OPEC, an alliance of countries attempting to stabilize oil prices through compliance of an agreed upon international production freeze aiming at eating into existing global supply, holds high hopes for and great stake in India.
Demand sinks but oil floats
The teetering oil market in India scrambles to recover as consumer inflation reaches historic lows. Dow Jones suggests that:
[su_quote]Inflation will undershoot the Reserve Bank of Indias 5% target for March, although concerns over firm oil prices and core inflation could prevent the central bank from lowering interest rates further.[/su_quote]
To say 2017 is off to a rocky start in oil trends would be an understatement, given the current state of affairs in India. However, though demand is rapidly sinking, as Wood Mackenzie assessed, it will ultimately resurface once the dust of demonetization settles. Consumption of fuel is expected to recover on a gradual barrel-per-day basis in the latter half of 2017. Oil can be added to the list of sectors deeply impacted by the abrupt cash shortage. While oil may have stayed afloat, it remains to be seen how long it takes for both domestic and international markets to adjust and recover from the effects of the currency pull. Meanwhile, the rest of Asia will be picking up the slack to churn a positive profit outlook (for the end of 2017) for fuel products, despite the Indian demand deficit.