Drop in Indian oil demand hits global market outlook; new COVID surge thwarts recovery after first wave

With scenes of people being taken on stretchers from hospital to hospital, gasping for air, only to be turned away, and left dying on the road, outside hospitals and in ambulances, the ravaging second India is suffering the world’s worst surge of the second wave of COVID. Though there is no national lockdown, local restrictions in acutely affected zones provide disturbing optics of empty streets, shuttered businesses and workers forced to stay indoors, prompting some of them to re-enact a scaled down version of the reverse migration.

Traffic in metros like Mumbai, Bangalore, and New Delhi have plummeted to levels experienced during the first wave of lockdowns a year ago. On top of night and weekend curfews, many states have imposed strict lockdowns overnight, shutting down non-essential businesses and limiting public transport.

In Mumbai, for example, traffic has come to a near standstill, with activity levels just 45 per cent of normal pre-pandemic levels, compared to the drop down to 35 per cent in April 2020. Overall, road traffic in India is at 87 per cent of pre-pandemic levels, according to global energy consultancy Rystad Energy. The agency’s mobility stringency index shows that Indians are just as restricted in their movement now as they were back in April 2020.

The continuously worsening situation in the country has triggered fears of another crisis in the global oil market, just when it appeared to be on a path of recovery following the disruptions caused by the first wave of the pandemic. Oil analysts fear that India’s struggle will slash an extra 575,000 barrels per day of oil liquids demand in April and 915,000 bpd in May 2021, disturbing the almost-balanced global oil market and building a sizeable glut.

According to the estimates of global energy consultants Rystad Energy, as India’s backstep coincides with OPEC+ bringing back much of its curtailed oil output, the demand loss from one of the world’s largest oil consumers will result in a global oil liquids supply surplus of 0.9 million bpd in April and 1.4 million bpd in May 2021.

The agency feels that as infections continue to rise and overwhelm the country’s health system further, India’s oil demand could lose more ground going forward, making further downgrades possible, both on magnitude and duration. When the country first locked down in April 2020, products demand cratered to 3.13 million bpd, but has been on a steady recovery trend over the past year. The localised new lockdowns in the past few days will result in an estimated 13 per cent demand drop in India in April compared to March 2021.

Refineries in India were churning nearly 5.5 million bpd before the pandemic, which cratered to 3.6 million bpd at the peak of the April 2020 pandemic surge. Since November 2020, throughput has been steadier at a monthly level of 5 million bpd.

According to Rystad, the big question for India will be how its refineries react to the sudden domestic demand drop. New Delhi, which has been publicly critical of OPEC+ artificially raising crude prices, is seen by observers deciding to notch down refinery operations in response to this period of lower domestic demand. But since not all refined products are consumed domestically, and many are marketed abroad, some of the more complex and profitable refineries may stick to business as usual, they feel.

So far, refinery-level data show sustained input levels despite the end-user demand cliff. Higher regional demand for gasoline could help Indian refiners to keep the balance by prompting a flood of product exports. In addition, reports of India’s largest refiners deferring maintenance due to a shortage of workers could support Indian refiners to maintain current levels of crude intake. This will likely be negative for margins though, and lower margins will be required to force a reduction in runs in the near term in the event of an extended drop in refined products demand.

The demand loss in India comes at a time when many other oil producers globally were planning to increase output. OPEC+ alone is set to add 2 million bpd of supply by July 2021, not including any potential upside risk to Iranian supply.

According to Rystad, the tragic crisis in India is a reminder that the road to recovery is anything but predictable or smooth, and that oil demand is still very much at risk in the near term. Overall, global macro fundamentals are hinting that economic recovery is already underway, but COVID-19 breakouts will continue to thwart progress and be a persistent threat, prompting OPEC+ to remain vigilant. (IPA Service)