India’s oil demand falls 2.1% on year in January but is expected to rebound in February

• Strong recovery in H2 is expected, driven by a broad-based pickup in economic activity
• India’s oil demand is forecast to rise by 260,000 b/d in 2022, up from growth of 240,000 b/d in 2021

India’s January oil product demand was down 100,000 b/d or 2.1% year on year, dragged lower by gasoil and gasoline, which were down 104,000 b/d and 38,000 b/d, respectively. Demand was dampened by the re-imposition of COVID-related restrictions. Kerosene/jet fuel demand eased on year by 2,000 b/d, and was down 23,000 b/d on month. It is worth mentioning that demand of all other products increased by a total of 43,000 b/d, with LPG up by 29,000 b/d.

India’s daily new COVID-19 cases have averaged 83,000 over the past week, down from the recent peak of around 347,000 on Jan. 21. Daily infections in cities like Delhi and Mumbai have dropped sharply. The states have been gradually removing restrictions with the reopening of schools and the state of Maharashtra consulting with experts to remove mask mandates. According to Oxford’s stringency index, which measures government responses to the COVID-19 outbreak, restrictions have eased since Feb. 1, which should be supportive for mobility and thereby demand for transportation fuels.

After a dent in domestic fuel demand in January, we expect the demand recovery to be quite swift in February, which can be seen from the toll transaction data released by the RBI. In fact, the Apple mobility average for early February rose 20% from the January level, while domestic flights are showing signs of a turnaround. Starting midnight Feb. 14, all international arriving passengers to India only need to self-monitor themselves for 14 days without the requirement of home quarantine; even the pre-arrival RT-PCR test has been waived on presentation of a valid vaccination certificate. We expect a rebound of India’s oil demand in February, up on month by 260,000 b/d.

India’s economy fared well in January with GST collection at Rupees 1.38 trillion, up 15% on year. Though January manufacturing and services PMIs eased from December’s levels, they remained well above the 50-threshold, indicating expansion in both sectors. However, a soaring consumer price index continues to be a cause of concern for the economy, with December 2021 inflation rising to a five-month high of 5.6%. On the monetary policy front, the Reserve Bank of India kept the repo rate at 4% in December, maintaining an accommodative monetary policy stance to support the economy.

The union budget this year announced Feb. 1 stressed infrastructure spending through roads, railways, housing and defense sectors under the mega infrastructure plan “PM Gati Shakti”. The capex allocation, which is the major driver for the infrastructure push in the current central government’s budget for FY 2022-23, has been increased by 35.4 % year on year to Rupees 7.5 trillion from the current Rupees 5.54 trillion, which will give boost to industries like cement, steel, etc, thus laying the foundation for good oil demand growth. The government has even pledged to build 25,000 kilometers of new highways in FY 2022-23 and an investment of Rupees 480 billion in the housing sector.

Elections are underway from Feb. 10 till March 7 in key Indian states. Despite high international oil prices, the domestic marketing companies might have not been able to pass on the high prices to customers mainly due to the polls, as retail fuel prices are a politically sensitive topic. We may expect a rise in retail prices in line with the high international prices once the polls are over, which may further fuel the already high inflation and have the potential to slow the already fragile demand recovery. In addition to the strategic petroleum reserves (SPR) release to state-owned refiners last year, in conjunction with other major economies led by the US to cool international oil prices, India also cut fuel taxes to ease the impact of high prices on consumers.

India depends heavily on crude imports, and it has relatively low SPR compared to other major Asian consuming countries such as China, Japan and South Korea. India’s relatively high inflation means that it has less leeway to boost its economy, though growth is expected to be strong at 8% for 2022. Gasoil demand is set to rebound strongly as manufacturing activity regains momentum and jet fuel use will also improve as international flights start to resume, though they are likely to remain well below capacity. Further ahead, India’s oil demand in H2 is expected to be 355,000 b/d higher than in H1, driven by a more broad-based pickup in economic activity amid an improving COVID situation and widening vaccination rollouts. Overall, India’s oil demand is expected to grow by 260,000 b/d in 2022, up from growth of 240,000 b/d in 2021.