India's October Oil Demand Surges 2.5%, 2023 Growth Projections Adjusted to 239,000/bbl

In October, India witnessed a remarkable upswing in oil products demand, experiencing a month-on-month increase of 118,000 barrels per day (bbl). This surge was attributed to below-average rainfall and irregular distribution, fostering robust factory activity and heightened mobility. According to a comprehensive report from S&P Global Commodity Insights, liquified petroleum gas (LPG), naphtha, and other minor products exhibited growth rates of 3%, 5%, and 13%, respectively. On a year-on-year basis, the oil demand marked a 6% increase, equivalent to 270,000 bbl, propelled by strong economic fundamentals.

Factors Influencing Oil Demand

Weaker-than-expected monsoon rains in India impacted diesel sales adversely in the previous month, disrupting sowing activities crucial for the agricultural sector. With nearly half of India's farmland lacking irrigation, the prolonged dry spell resulted in exceptionally low soil moisture levels, potentially hindering crop growth, according to S&P Global.

In July 2023, India's crude oil production reached 2.50 million metric tonnes (MMT), reflecting a 2.1% growth compared to the previous year, as reported by the Petroleum Planning & Analysis Cell (PPAC). Data released by the Oil Ministry indicated that Oil and Natural Gas Corporation (ONGC) contributed 1.62 MMT of crude oil, while Oil India Limited (OIL) and private sector producers (IOCMKT) contributed 0.28 MMT and 0.60 MMT, respectively.

Diesel and Petrol Demand Trends

According to PPAC data, diesel demand experienced a 3% month-on-month drop, but remained 5% higher than the same month last year and 9% above the levels seen in October 2019. The decline in demand from the agriculture sector, particularly in tractor sales, contributed to the reduced diesel consumption. However, diesel demand is anticipated to be nearly 7% above pre-COVID-19 levels this year, primarily driven by the robust mobility sector.

Petrol demand surged to 851,000 bbl per day in October, benefiting from lower rainfall that sustained strong mobility demand. Increased usage of in-car air conditioning, driven by higher temperatures, also played a role in boosting petrol consumption. Private fuel retailers witnessed a 2.5% month-on-month increase in market share. India's petrol demand not only rebounded to pre-COVID levels in 2021 but is anticipated to be approximately 23% higher than 2019 levels in 2023.

Revised Oil Demand Projections and Industry Insights

S&P Global revised its projections for India's oil demand in 2023, lowering the expected growth to 239,000 bbl per day, a reduction of 3,000 bbl per day from the previous estimate. Middle distillates, gasoil, and kerosene/jet fuel are expected to contribute over 50% to this growth, while gasoline and naphtha combined will account for 30%. Despite a seasonal dip anticipated in the July-September quarter due to the monsoon, demand is expected to rebound in the October-December quarter with the onset of festivities in India.

Analyzing the Oil Production Landscape

A closer examination of the oil production landscape in July 2023 reveals a total output of 2.50 MMT, showcasing a commendable growth of 2.1% compared to the same period the previous year. Key players in this scenario include Oil and Natural Gas Corporation (ONGC), contributing a significant 1.62 MMT of crude oil, while Oil India Limited (OIL) and private sector producers added 0.28 MMT and 0.60 MMT, respectively. These production figures underscore the resilience and dynamism of India's oil industry.

Understanding Diesel Demand Dynamics

Diesel, a vital component of India's energy matrix, witnessed a 3% dip in demand on a month-on-month basis. However, when viewed against the backdrop of the previous year, diesel demand remained 5% higher and an impressive 9% above the levels recorded in October 2019. Analysts from S&P Global, such as Himi Srivastava, Senior Analyst, South Asia Oil Markets, emphasize that despite the contraction in tractor sales impacting the agricultural sector, diesel demand from the mobility sector remains robust. Data on E-way bills generation and daily average highway toll transactions validate this trend.

The Resilience of Petrol Demand

In contrast to diesel, petrol demand experienced an upward trajectory, reaching 851,000 bbl per day in October. The confluence of lower rainfall, contributing to sustained mobility demand, and higher temperatures leading to increased use of in-car air conditioning played pivotal roles in driving up petrol consumption. Notably, private fuel retailers witnessed a 2.5% month-on-month increase in market share, indicative of a shifting landscape in India's fuel consumption patterns.

Future Outlook and Growth Potential

Despite the revised projections for 2023, indicating a growth rate of 239,000 bbl per day, S&P Global remains optimistic about India's oil demand. Middle distillates, gasoil, and kerosene/jet fuel are poised to play pivotal roles, collectively contributing over 50% to the anticipated growth. Gasoline and naphtha are expected to contribute 30%, showcasing a diverse and multifaceted landscape within the oil sector.

While a seasonal dip is expected in the July-September quarter due to the monsoon, the October-December quarter is anticipated to witness a resurgence in demand, driven by festive activities in India. S&P Global projects that India's oil demand in 2023 will be 7% higher than 2019 levels, and a further 11% growth is anticipated in 2024. This optimistic outlook is underpinned by the solid economic growth trajectory, with a notable emphasis on industrial and construction activities shaping the country's oil consumption patterns. As India navigates through dynamic market forces, its oil sector remains a resilient and integral component of its economic landscape.