India's H2 oil demand growth unlikely to repeat H1 momentum from lower base

India's robust oil consumption growth of nearly 18% year on year in June lifted cumulative first-half 2022 consumption growth close to double-digits, sending a strong signal that consumption recovery in on a sustained path towards pre-pandemic levels.

But analysts said since year-on-year growth rate in H1 2022 was due to a lower base in the same period of 2021, witnessing a similar rate of year-on-year growth in second half of this could prove difficult.

Provisional data from the Petroleum Planning and Analysis Cell showed that demand for oil products rose by 17.9% year on year to 18.67 million mt, or 4.9 million b/d in June, pushing up cumulative demand for oil products by 9.1% year on year to 109.7 million mt, or 4.8 million b/d, in the January-June period.

Amit Bhandari, Senior Fellow for Energy, Investment and Connectivity at Gateway House, said that more than 9% growth in oil consumption seen in H1 was because consumption grew from a lower base in the same period last year.

"Based on the past trends, demand for diesel and jet fuel would likely account for a bigger part of the growth in demand in H2 as consumption of these two products had fallen sharply due to the pandemic," he added.

In June, demand for diesel and gasoline rose 23.9% year on year and 23.2% year on year, respectively, reflecting health recovery in demand for transport fuels. As a result, cumulative demand for diesel and gasoline rose 9.6% and 14.4% in the January-June period, respectively, PPAC data showed.

"We expect that demand for oil products in H2 this year would be from a higher base from the same period of last year, which would translate into moderate growth in the demand in H2 of this year," another Mumbai-based analyst added.

Growth momentum may slow

According to Platts Analytics, India's oil demand is expected to slow in the third quarter because of the monsoon season, before rebounding in the fourth quarter on the back of festive activity. On a year-on-year basis, oil demand in H2 is expected grow by 200,000 b/d, down from 360,000 b/d in H1, which was boosted by a low base last year. Overall, India's oil demand is expected to grow by 280,000 b/d in 2022, before easing in 2023.

"Middle distillates, such as gasoil and jet fuel combined, will account for more than half of 2022 growth, partly due to a slow recovery last year. But headwinds remain in the form of rising fuel prices and global recession fears," said Lim Jit Yang, advisor for Asia-Pacific oil markets at Platts Analytics.

As demand moves to a sustained recovery path, refiners are stepping up efforts to boost throughput, while the government has imposed export taxes on oil products to ensure plentiful supplies at home.

The oil ministry said July 1 that India had decided to impose new export tax on diesel, jet fuel and gasoline, in an attempt to curb outflows and address domestic supply tightness. The export duty stands at Rupee 13/liter (16 cents/liter) for diesel, while that for jet fuel and gasoline was set at Rupee 6/liter. There were no prior duties on these oil products.

"We also look for further deceleration in export growth due to the export taxes imposed on petroleum products and a weak external environment," Oxford Economics said in a recent research note.

But two weeks after the introduction of the taxes, various rates have been scaled down

Refiners lift run rates

India's average run rate for all refinery categories rose to 110% in May from 105% in April, the latest survey by the oil ministry showed, as refiners eyed gains from higher margins and expectations of higher fuel demand during the summer season.

Average May runs were also above the 93% rate of May 2021 as higher crude prices ensured greater returns from cracks.

State-owned refineries recorded a 113% run rate in May from 87% in May 2021 and 110% in April. Private refineries recorded a 104% average run rate in May from 102% in May last year and 96% in April.

Analysts added that the biggest threat for Indian oil demand outlook currently was high crude oil prices, adding that the government would be looking for ways to pass on the rising oil import costs to end consumers.

"India's reliance on imports of expensive crude oil and natural gas has led to an increasing trade deficit and devaluation of the rupee. The government's subsidy burden has also increased tremendously due to the high prices," The Institute for Energy Economics and Financial Analysis said.

India imported 19.57 million mt, or an average 4.6 million b/d, of crude in May, down 9.1% from April, PPAC data showed. But in the cumulative January-May period, India's crude imports rose 8.5% year on year to 96.97 million mt, or 4.7 million b/d, as domestic demand for oil products gained momentum.