This article was published in English on 11.02.2021.
When analyzing key data for oil, investors should evaluate the asset demand from a regional perspective. Over the last few years, we’ve been hearing constant promises that India will not be a major player in the demand future, due to the clean energy plans that are not yet clear. Don’t listen to them.
India today will be a major consumer of petroleum products and only a more important consumer in the years to come. Despite the media focused on clean energy growth, there are many reasons for investors to believe that in a decade India’s oil demand will grow much larger than in other countries. That’s why every investor needs to watch India and its demand.
A lot has been said about India’s transition to clean energy and will continue to be said. One of Bloomberg’s latest articles, which included the International Energy Agency’s (IEA) report on India’s energy outlook, made the headline “India must spend more than $ 1.4 trillion to switch to clean energy.” This $ 1.4 trillion can be divided into 20 years, but it still costs $ 70 billion a year. This is an unreasonable figure and corresponds to 70% more than what India’s current policy would like. Such plans and goals are completely unreal.
In 2019, India was the third largest consumer of oil and petroleum products, after the USA and China. Demand reached 4.9 million barrels per day that year, but many believe it would have increased if the peak monsoon season and economic downturn had not hampered growth in demand.
It is difficult to predict the future of the post-coronavirus economy, but the IEA acknowledges that India is a “key factor” for growth in oil demand. The IEA predicts that India’s oil demand will increase to 6 million barrels per day by 2024. In short, India’s oil demand is not going anywhere.
Instead of believing in unreal energy investment goals, investors should focus on the following points on how India’s demand growth will affect oil market fundamentals:
- India is already a net exporter of refined products, but with the change in consumption patterns, India may soon become a net importer if it does not substantially increase its refining capacity. Although India says it plans to increase its refining capacity from 5 million barrels to 8 million barrels per day by 2025, the IEA does not think that such growth is possible and believes that India’s refining capacity could only reach 5.7 million barrels by 2024. If the IEA is right then India will have to import more gasoline and diesel fuel, along with crude oil to keep up with domestic consumption. However, there is great interest from international oil companies in building new refineries in India. The process is slow due in part to India’s business system. The distinction between oil and refined products is key for investors. If India does not increase its refining capacity, demand for oil will decrease, but more and more refined products will be imported.
- Investors must be aware of where Indian oil comes from. India’s domestic oil reserves are smaller than China’s, and India’s production capacity is less than China’s. Therefore, as the population’s demand for oil increases, Indian oil imports are expected to rise significantly. Currently 65% of Indian imports come from the Middle East. This makes India vulnerable to geopolitical tensions in that region. Now Iraq is India’s largest oil supplier in the Middle East, but Iran will likely increase its sales to India if the sanctions are lifted. India is under pressure to diversify its oil sources to avoid strategic risks, and may look to the US, Canada and Brazil for more crude oil supplies in the future.
- Those interested in natural gas investors and those associated with it should also watch India. While major organizations within India and internationally are pushing their solar and wind energy investments for India, India could take great steps towards improving its emissions profile if it turns to natural gas. As of 2019, 45% of India’s energy consumption was coal. Oil and other liquids were 25%, and biofuels and waste energy (possibly wood and manure) was 20%. Natural gas provided only 6% of India’s needs. Increasing the use of natural gas to replace coal, waste and biofuels will reduce emissions in India. Indeed, India seemed ready to increase its use of gas when three Indian companies entered a consortium with Iran in 2008 to develop an offshore gas field in the Persian Gulf. The relationship recently ended as India was reportedly forced to postpone work due to US sanctions. If these sanctions are lifted by President Joe Biden’s administration, it is possible that Indian companies will continue to work with Iran and bring more gas to India.
- All these green energy schemes for India are impractical. Let’s start with the IEA’s $ 1.4 trillion offer. India’s total budget for 2020-2021 is $ 420 billion. Its GDP in 2020 was estimated at less than $ 2.6 trillion. In other words, India cannot afford $ 70 billion each year for environmental issues. And if India is to invest in major infrastructure changes, the people of India will benefit more from meeting urgent needs such as providing universal clean water. In 2017, the minister responsible for energy and electricity said there would be no domestic sales of gasoline and diesel cars until 2030. This was an absurd idea considering the transportation needs within India, the state of EV (electric vehicle) technology, and the income level of the average Indian family. The EV takes a long time to charge and has a limited range, so it’s not useful for long distances. Also, in the heat, its battery is wasted and India is generally hot. On the way to the jungles of central India or on the Himalayan roads EV will be impractical and perhaps dangerous. Moreover, no one was able to produce cheap EVs that could compete in the Indian market against the internal combustion engines sold by Tata (NS 🙂 and its local competitors. Investors should expect that oil will continue to be used for transportation in India for a long time.
- However, investors should not expect to see the astronomical demand growth seen in China over the past six years in India. One of the reasons for this huge growth in Chinese demand was that it benefited from low oil prices at the beginning of 2015. China has greatly expanded its strategic oil reserves, and nominally, private firms in China have also increased their stocks (possibly under the auspices of central authorities). India also has a strategic oil reserve, but it did not implement China’s strategy in the same way. Investors should not expect such an explosion of demand for India, as it is not possible for India to spend that much consistently to increase stocks. Rather, Indian demand may be closer to what it can refine.
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