• India’s May oil demand up 22% on year from low base, driven by gasoil, gasoline
• H2 demand expected to strengthen, driven by broad-based economic pickup
• India’s demand expected to grow 250,000 b/d in 2022, 190,000 b/d in 2023
• Middle distillates will account for more than half 2022 growth, driven by pent-up demand

India’s oil product demand in May was up 860,000 b/d or 22% on the year, from a low base in 2021. This is some 80,000 b/d higher than our growth forecast, partly due to stronger-than-expected demand for transportation fuels. India on May 21 announced a cut in excise duty on gasoline by 8 rupees ($0.10) per liter, and 6 rupees ($0.07) per liter on diesel, which provided some support for demand of the two fuels. On a year-on-year basis, demand growth was driven by gasoil, gasoline and other minor products, which were up 416,000 b/d, 282,000 b/d and 161,000 b/d, respectively. Kerosene/jet fuel and fuel oil also posted positive growth, rising 67,000 b/d and 25,000 b/d, respectively. But growth was partially offset by naphtha, which fell 95,000 b/d, with LPG demand remaining steady.

The new tax regime on gasoline and gasoil could result in a loss of about Rupee 1 trillion to the government in annual revenue due to the lower collection. The more immediate problem is sky-high inflation and the pressure being put on the Reserve Bank of India (RBI) to raise its policy interest rate and tighten monetary conditions. The consumer price index inflation has been at an eight-year high of 7.79% in April, way above the threshold of 6% set by the RBI, along with the India’s wholesale price index inflation hitting a record high of 15.1% in April which is a testimony that the industrial sector faces profitability issues due to high input costs. Food inflation has also been very high and was 8.38% in April, which was exacerbated by the Russia-Ukraine conflict. Lastly, the RBI’s most recent policy statement said: “The projections indicate that inflation is likely to remain above the upper tolerance level of 6 per cent through the first three quarters of 2022-23. Persisting inflationary pressures could set in motion second round effects on headline CPI. Hence, there is a need for calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures.”

In the near term, we expect India’s oil demand to remain robust unless fuel prices are raised sharply, which are unlikely at this state due to high inflation. In India, the high refining margins have benefited export-oriented private refiners much more than the state-owned Oil Marketing Companies. Further ahead, India’s H2 oil demand is expected to be around 190,000 b/d higher than in H1, even as demand is expected to ease due to the monsoon season, driven by a more broad-based pickup in economic activity as the country adapts to live with COVID-19 amid higher vaccination rates. The government will also provide a fresh subsidy of Rupee 200 per cooking gas cylinder to over 90 million beneficiaries under an assistance program introduced for women below the poverty line, which should be supportive for LPG demand.

Overall, India’s oil demand is expected to grow by 250,000 b/d in 2022, with growth easing to 190,000 b/d in 2023. Gasoil demand is set to improve as manufacturing activity regains momentum and jet fuel use improves as international flights start to pick up steam, though they are likely to remain well-below capacity. Middle distillates (gasoil and kerosene/jet fuel combined) will account for more than half of 2022 growth, partly due to a slow recovery last year. Meanwhile, India’s May PMIs for both manufacturing and services stayed well above the 50-threshold level, pointing to expansion in the sectors. But there are risks of downward adjustments as the Russian-Ukraine conflict continues to evolve and the worry of a global or regional economic recession has been growing. Besides India, Southeast Asia is also expected to contribute substantially to regional growth this year as most countries are moving toward re-opening their economies.