New Delhi —
The cash crunch following India's move to demonetize more than 80% of its currency is expected to dampen the country's appetite for oil products over the next three months before eventually rebounding as fundamentals remain robust, Lalit Kumar Gupta, chief executive officer of Essar Oil, told S&P Global Platts on the sidelines of the Petrotech conference in New Delhi.
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Gupta said in an interview late Tuesday that oil products demand growth could hover in the 5%-6% range over the next three months, easing from close to double-digit growth that India has been witnessing for the most part of 2016.
"The impact of demonetization will be there for about three months," Gupta said. "Oil demand will slow down, I think. But there is no reason for demand to remain that low for a long time. Ours is a growing economy and demand should rebound after this short period of slow growth."
India announced scrapping of 1,000 and 500 rupee notes on November 8 with immediate effect, but it allowed them to be used for a slightly longer period at fuel stations.
This led to a rush in filling up of fuel tanks. As a result, while gasoline and gasoil sales in November are likely to rise sharply, even though actual consumption may not have gone up, sales from December onwards are expected to slow for a few months because of the cash shortage.
India's oil product demand grew 8.5% year on year in 2015 to 177 million mt, or 3.81 million b/d, led by double-digit growth in gasoline, LPG and naphtha, according to data from the oil ministry's Petroleum Planning and Analysis Cell. Over January-October, oil products demand rose 8.9% year on year to 159.62 million mt, or 4.1 million b/d.
"Looking at the growth outlook, the long-term trend for oil demand in India looks very promising," Gupta said.
He added that while the government's ambitious plan to promote the use of LPG and discourage kerosene and firewood use would help to keep LPG demand growth at double digit levels, the government's "Make in India" initiative -- which aims to raise the manufacturing sector's share in GDP to 25% from 16% by 2025 -- would provide massive support to diesel demand.
"The other bright spot is aviation fuel," Gupta said. "Air travel is no more a luxury in India. It has become affordable to a lot of people as incomes rise. We will witness strong growth in that sector."
Prime Minister Narendra Modi told the opening session of the conference Monday that in the global civil aviation market, India, which is currently the eighth-largest market in the world, would become the third-largest by 2034, adding that growth in the aviation sector would multiply demand for aviation fuel in India four times by 2040.
IMPACT FROM OPEC CUT
Gupta said that OPEC's decision late last month to reduce production had supported crude oil prices, but the market was unlikely to rise sharply.
"I don't see the scope for oil prices going beyond $60/b," Gupta said. "Producers are comfortable when prices are in the range of $50-$60/b. They also know that once prices cross those levels, it would start affecting demand worldwide."
OPEC decided on November 30 to hold production at 32.5 million b/d starting January 1, 2017 -- the first coordinated cut since 2008 -- amounting to an approximate 1.2 million b/d cut from current output levels. The deal exempts Libya and Nigeria and is contingent on key non-OPEC producers also agreeing to cut 600,000 b/d in total.
"At current price levels, I don't think it will affect Indian demand," Gupta said.
He added that India's crude oil imports would rise by about 5%-7% next year following the full commissioning of state-run Indian Oil Corp.'s Paradip refinery, which has an annual capacity of 15 million mt.
"Assuming Paradip accounts for about 5%-6% of the overall refining capacity India has, we expect crude imports to rise at least by a similar volume next year," Gupta added.
Russian oil giant Rosneft and a consortium led by commodities trading group Trafigura in October agreed to buy a 98% stake in Essar Oil, India's second-biggest private refiner, in a deal which gives the companies access to a world-class refinery and a footprint in India's growing retail fuel market. Gupta declined to comment on how things would change once Rosneft's management takes over. "It's too early to say how things will change. Let them come and take seat first."
Essar operates a 400,000 b/d refinery in Vadinar on the west coast of India, the second largest privately held refinery in India after Reliance Industries' Jamnagar plant.
Vadinar has a Nelson Complexity Index of 11.8. It has the capability to process around 85% of heavy/ultra-heavy crudes and produce Euro 4/5 grades of products.
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