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Singapore —
The dramatic rise in India's oil demand shows no signs of faltering, leading analysts to say that the country will remain a driver of Asian growth in 2017.

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Consumption is expected to rise 7-8% this year, outpacing China's demand growth for the third consecutive year.

The cash crunch following New Delhi's move in early November to demonetize more than 80% of its currency is expected to temporarily dampen the country's appetite for oil products in the first quarter, or maybe a little longer.

But gains in oil demand that the country is set to achieve from the "Make in India" initiative -- which aims to raise the share of manufacturing in GDP over the next few years -- will more than offset the negative effects of demonetization, analysts said.

The government's clean fuel drive, sharp anticipated growth in transport demand and air travel, and the country's insatiable growth for petrochemicals will act as a boon for gasoline, jet fuel, LPG and naphtha, helping oil products to post close to double-digit growth in 2017 -- similar to that seen last year -- if not higher.

"For the third year in a row, India's oil demand growth will outpace China's demand growth," Platts Analytics said in a note, adding that it was expected to grow at about 7% to 4.13 million b/d in 2017, compared with 3% in Chinese oil demand to 11.5 million b/d.

India's demand for oil products in November rose 12% year on year to 16.6 million mt, or 4.35 million b/d, data from the Petroleum Planning and Analysis Cell showed.



Over January-November, oil products demand rose around 9% year on year to 176.36 million mt, or 4.1 million b/d.

While growth fundamentals for oil in India remain high, slower growth in the initial months of 2017 because of demonetization might pull down the overall oil demand growth in 2017 to a shade below 2016 levels, according to analysts.

"If successful, the effects of demonetization are expected to be temporary, and indexes are expected to bounce back," said Amrita Sen, chief oil analyst at Energy Aspects.

"We believe that H2 2017 oil demand will see limited impact from demonetization as the initial economic impact peters out and government spending, particularly on infrastructure, rises from increased tax collection. Indeed, if implemented correctly, demonetization will lead to a jump in private investment and more public spending on welfare measures," she added.


LPG GROWTH STORY CONTINUES


The BJP-led government, since coming to power in 2014, has undertaken a series of initiatives to help boost LPG penetration across the country.

It has aggressively pushed to expand the LPG dealership network in the country, while it has urged the more affluent class to give up LPG subsidies and pass those savings to the economically poorer sections of society.

"We are seeing a series of government initiatives to enhance LPG penetration in the rural areas. This should help to sustain growth rates for the clean fuel at double-digit levels for several months in 2017," said Sri Paravaikkarasu, head of oil, East of Suez, at Facts Global Energy.

She said LPG demand was expected to grow by about 10.5% year on year in 2017, compared with an estimated 11% in 2016. And as the government discourages the use of kerosene in households, its demand is estimated to fall by close to 11% from 2016 levels, according to Facts Global Energy.

The BJP-led government last year gave the go-ahead to state-owned companies to raise the prices of kerosene, which accounts for more than 40% of the total petroleum subsidies, by a small amount every month until April.


TRANSPORT FUELS


Since India deregulated diesel prices in October 2014, gasoline demand continues to grow sharply and analysts expect demand to show double-digit growth again in 2017.

"Despite demonetization hitting motorcycle sales in the near term, growth should rebound in the second half of 2017. Passenger vehicle sales, which is mainly backed by direct loans, should continue to grow. This should support buoyant gasoline sales after the ripples of demonetization get absorbed in about three to four months," Paravaikkarasu added.

Analysts expect gasoil demand to grow by about 4.5-5% in 2017, slightly lower than 2016 levels, as demonetization had affected rural incomes.

But naphtha demand is expected to show double-digit growth.

"Two petrochemical projects -- Reliance's aromatic expansion and OPAL's mixed feed cracker -- which are expected to come on stream in 2017, will give a big upward push to naphtha demand," Paravaikkarasu said.

"Overall, any negative impact in the opening months from demonetization should be outweighed by expansion in LPG, naphtha, gasoline and jet consumption, keeping overall oil demand growth in 2017 at about 7-7.5% in 2017," she added.


THE DOMESTIC PUSH


India is making a concerted effort to lower its reliance on imported crudes with the government focusing on boosting domestic production, promoting renewables, and improving the refining process, at a time of increasing demand.

Highlighting the growing importance of energy security, Prime Minister Narendra Modi in December said that India would strive to reduce crude imports by 10% by 2022.

The country imported 197.5 million mt, or 4.33 million b/d, of crude oil in the first 11 months of 2016, up 10.5% year on year.

India's refinery throughput has risen 7.4% year on year to 4.88 million b/d.

For a country dependent on imports for 80% of its crude oil needs, India's oil import bill is subject to wild swings linked to international price volatility, which in turn has repercussions on the country's current account balance and overall economy.

Oil minister Dharmendra Pradhan has said that India will reduce its dependence on crude imports with the help of a five-point plan -- raising domestic oil and gas production, improving energy efficiency, promoting alternative fuels and renewables, demand substitution, and improving the refining process.


STRATEGY ON STORAGE


India's oil ministry last year carved out a detailed plan that will help the country's strategic oil reserve storage capacity to more than triple over the next five years.

Under the first phase, India has set up strategic petroleum reserves in three locations in the south -- Visakhapatnam, Mangalore, and Padur -- with a combined capacity of 5.3 million mt, or 38.8 million barrels, of crude oil.

As demand grows and the government pushes its "Make in India" initiative, the oil ministry has finalized plans to set up two new larger storage facilities, each with about 5 million mt of capacity, in the eastern state of Odisha and in the northwestern state of Rajasthan. It will cost about $2 billion.

"Prime Minister Modi's 'Make in India' initiatives and push towards manufacturing remains in place, where by road building targets of 40 km per day and attracting foreign companies to establish factories, India will continue to boost oil demand," Energy Aspects' Sen said.

--Sambit Mohanty, sambit.mohanty@spglobal.com

--Edited by E Shailaja Nair, shailaja.nair@spglobal.com