After a year of faltering growth, India's oil demand is set to stage a recovery in 2018 as New Delhi aims to boost infrastructure spending and step up efforts to inject liquidity into its banking sector, while the economy starts to adjust to a series of economic policy reforms introduced last year.
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Most oil analysts are of the view that the initial teething problems of India's key economic reforms -- demonetization and the Good and Services Tax -- are largely over, setting the stage for demand to bounce back in 2018. But rising crude oil prices could have some dampening impact on demand.
"India's oil demand is expected to bounce back in 2018 on improving economic activity, especially with the government stepping up attempts to stimulate the economy with increased investment in roads and recapitalization of public sector banks," said Lim Jit Yang, director of oil market analysis for Asia Pacific at PIRA Energy Group, a unit of S&P Global Platts.
He added that PIRA expects India's oil demand to grow by 300,000 b/d in 2018, compared with 120,000 b/d in 2017.
India's oil consumption posted modest growth in 2017. While overall oil products demand in 2017 was 200.51 million mt, up 1.8% from 196.97 million mt a year earlier, on a barrel per day basis, demand grew 2.1% to 4.31 million b/d in 2017, from 4.22 million b/d in the previous year.
While jet fuel posted the sharpest growth of 9.3% year on year in 2017 to 7.49 million mt, from 6.85 million mt, LPG also registered healthy growth in the year, rising by 7.5% to 22.94 million mt, from 21.35 million mt.
JET FUEL, LPG - SHINING STARS
According to estimates by CRISIL, a unit of S&P Global, Available Seat Kilometers -- the number of seats available multiplied by the number of miles or kilometers flown, which is used as a measure for growth in air travel -- is expected to increase by 18% in fiscal 2017-2018 (April-March) in the country. This in turn will strongly support the growth in aviation fuel demand.
On the LPG front, India is aggressively pushing to ensure that the country embraces LPG as a cooking fuel. The country is expected to invest $3.9 billion-$4.7 billion in developing infrastructure facilities for LPG to raise household connections to 95.5% by 2020, according to oil ministry officials.
Among the oil products that witnessed negative growth in 2017, naphtha demand fell the most, easing by 45.6% to 12.76 million mt, from 23.47 million mt. Kerosene demand fell by 28.6% to 4.08 million mt, from 5.7 million mt, pulling down overall growth numbers.
Signs of a recovery in demand are emerging, with the country's consumption of oil products growing 7.5% year on year to 17.39 million mt, or 4.4 million b/d, in December 2017, latest provisional data from the Petroleum Planning and Analysis Cell showed.
"We expect Q1 2018 Indian demand growth to soar, especially as economic momentum is gathering pace and the government is set to announce an infrastructure investment hike of at least 10% in its upcoming budget. Demand growth will also be aided by an already announced government boost to banking sector liquidity," Amrita Sen, chief oil analyst at Energy Aspects, said.
"We maintain our view that Indian demand growth will rebound strongly in 2018, and India, along with Brazil and Saudi Arabia, will be one of the key swing factors for demand growth this year," she added.
The World Bank expects India's GDP to grow at a robust 7.3% in 2018, and even at a higher rate of 7.5% the following year, led by higher private consumption, rising infrastructure spending, and a revival of the corporate sector, while it adjusts to the new GST.
"Overall economic growth will accelerate as the impact of transient factors -- demonetization and the introduction of GST -- is waning. With headwinds abating, India's oil products demand is getting back on track," Senthil Kumaran, senior analyst at Facts Global Energy, said.
INFRASTRUCTURE, MANUFACTURING PUSH
Demand for diesel in December rose 8.3% year on year to 7.12 million mt, from 6.57 million mt in the same period a year earlier, although for the whole of 2017, diesel demand grew only 2.3% to 79.24 million mt, from 77.45 million mt a year earlier.
"Anecdotal reports suggest that December's demand has surprised to the upside, especially diesel, a trend that refiners expect to persist through 2018 ahead of the general election in 2019," Energy Aspects' Sen said.
"We are more positive on diesel than gasoline as the former will receive a boost from the government's measures on infrastructure spending while for gasoline, rising oil prices and growing share of ethanol may cap growth," she added.
FGE expects increasing rural income levels, a rise in spending on construction projects and an overall rebound in growth in the manufacturing sector would steer the gasoil demand growth rate to 3.3% in 2018.
Amid a positive outlook for oil demand, rising crude oil prices certainly are adding to the worries of policy makers in India, which imports thebulk of its crude oil requirements.
Analysts and market participants are of the view that if crude oil rises further, some key fiscal reforms undertaken in recent years by India would have to be tweaked -- for instance, consumption taxes -- in an effort to soften the impact of rising global oil prices.
As India's retail oil prices are now market-linked, consumers can already feel the trickle-down effect of a jump in crude oil prices.
"Higher oil prices this year will have some dampening effect on India's oil demand, but growth will be propelled by improving economic activity," PIRA's Lim said.
"PIRA expects oil prices to ease from current levels, with Dated Brent prices to average around $65/b."