India's economic growth is set to pick up amid expectations that infrastructure and banking sectors will get a renewed push. The World Bank expects India's economy to grow by 7.3% this year. What does this mean for the country's oil and gas sector?
S&P Global Platts Senior Editor for Oil News and Analysis Sambit Mohanty looks at the factors that will drive India's energy sector this year, including fiscal reforms, as well as trends in oil demand and LNG imports.
What's in store for India's oil and gas sector in 2018?
By Sambit Mohanty, Senior Editor, Asia Oil News and Analysis
Welcome to The Snapshot, our series examining forces shaping and driving global commodities markets today.
For India's oil sector, 2017 was a year of challenges. The country posted modest demand growth of 2%, rising to 4.31 million m/d. While jet fuel posted the sharpest growth of 9.3%, LPG also witnessed healthy growth, rising 7.5%. A series of policy reforms took a toll on industry and manufacturing, pulling down overall growth. And as a result, oil demand received its share of bad news.
But the initial teething problems from the reforms -- demonetization and the Good and Services Tax -- seems to be largely over, setting the stage for demand to bounce back in 2018.
World Bank projects India’s economy will grow by 7.3% in 2018
The World Bank expects GDP to grow at a robust 7.3% in 2018, and then climbing to 7.5% the following year. Higher private sector consumption, rising infrastructure spending, and a corporate sector revival is expected to aid India's GDP growth.
Signs of a recovery in oil demand was evident from December data. The month saw demand growing 7.5%.
PIRA Energy Group expects India’s oil demand to grow by 300,000 b/d in 2018
PIRA Energy Group, a unit of S&P Global, expects India's oil demand to grow by 300,000 b/d in 2018, compared with only 120,000 b/d in 2017.
As the government aims to boost capital spending and inject liquidity into its banking sector, it has improved the consumption outlook. There are expectations that India will soon announce a package to boost infrastructure investment.
Rising oil prices add to the worries of India’s policy makers
But crude oil prices are rising and that can't be ignored. It's certainly adding to the worries of India's policy makers.
If crude oil rises further, some key fiscal reforms undertaken in recent years would have to be tweaked -- for instance, consumption taxes -- to soften the impact of high prices.
Also, as retail prices are now market-linked, consumers can already feel the pinch of rising crude prices. If prices rise further it could have some dampening impact on domestic oil demand.
In addition to oil, the LNG market in India is also witnessing dramatic changes in demand patterns. LNG demand is expected to hit close to 25 million mt in 2018, a 25% growth over 2017, and eventually 30 million by 2020, according to Platts Analytics.
Short-term deals will increasingly become a part of import strategy. Large importers, such as GAIL and IOC, are already buying more LNG from the spot market.
The emergence of new importers, not restricted by long-term contracts, and increased third-party access to import terminals are encouraging more competition in India's downstream markets. This means new risk for traditional importers, which would eventually force them to prioritize price competitiveness and risk management over long-term supply security.
It definitely looks like a year of dramatic growth in oil demand for India's energy space.
Until next time on The Snapshot, we’ll keep an eye on the markets.