24 Million New Vehicles in India Give Oil Prices a Lift
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The latest rebound in oil prices is getting help from an unexpected source: surging demand from Asia’s emerging economies
The latest rebound in oil prices is getting help from an unexpected source: surging demand from Asia’s emerging economies.
That surge is helping offset slower growth in developed countries and giving more potency to the effect of a recent string of outages that have curbed supply.
India, especially, is helping to up the slack from struggling economies, whose lackluster growth has contributed to oil prices’ long slide. The durability of India’s demand could be a big factor in whether oil’s recent run to a six-month high over $50 a barrel can be sustained.
“The big news in demand is growth in India, which now rivals China,” said Daniel Yergin, vice chairman of consulting firm IHS. “India really is seen as the growth market for oil.”
India is fueling a rapid economic expansion, with consumption hitting a record 4.35 million barrels of refined fuels a day during the first three months of the year, according to the International Energy Agency. That is up more than 10% from a year earlier and a big pickup from 2015’s pace.
India’s oil demand in the first quarter grew more rapidly than China’s for the first time in nearly four years. The IEA estimates Indian refined-product demand grew by 400,000 barrels a day in the first quarter, compared with 353,000 barrels a day for China.
Much of it is heading straight into Indian consumers’ gas tanks as a driving culture expands. Government data show gasoline demand grew by 14.5% in the 12 months through March. Demand for diesel, which accounts for more than 40% of all the refined fuels consumed by Indians, grew by 7.5%.
Economic development has been a priority for the government of Prime Minister Narendra Modi. The Indian economy grew at a 7.6% clip in the year ended this March according to government data, and the country’s finance ministry has projected growth of between 7% and 7.75% in the current fiscal year.
Questions have been raised about the accuracy of the country’s growth numbers, but demand for vehicles is clear. In the latest fiscal year, the country built 24 million new vehicles and sales of new passenger vehicles rose 7.2%, according to the Society of Indian Automobile Manufacturers. The Modi government is encouraging the trend with a commitment to build 30 kilometers of new roads a day.
The trend has been a boon to India’s refining industry. Indian Oil Corp., the state-owned Indian refiner that owns 11 of India’s 23 refineries, has its facilities running at nearly 100% capacity to meet demand, said the company’s Chairman Balasubramanian Ashok.
The company in February opened a new refinery in the eastern city of Paradip that will eventually process another 300,000 barrels of crude daily.
“It shows that a lot of people are buying automobiles,” Mr. Ashok said in an interview. “The economic growth story is a large contributor.”
One side-effect of higher demand, Mr. Ashok said, is that his company increasingly has to dip into the spot market, as its needs exceed the supply it has locked up in longer-term contracts. Currently, the company sources about 20% of its supply from the spot market, he said, a figure that has grown over the past few years.
Driving also is up in the U.S., the world’s largest oil market. Americans have responded to low fuel prices with purchases of bigger vehicles and more miles on the road. Driving miles hit a record in 2015, and growth has since accelerated, according to Federal Highway Administration figures.
As a result, U.S. gasoline consumption is expected to jump 1.7% to more than 9.3 million barrels a day this year, the highest annual average on record, according to the government’s Energy Information Administration.
China, like India, is bringing in lots of oil. Its statistics bureau says imports are up 12% so far this year. Together with India, it accounted for more than half of global demand growth in the first quarter.
Yet the picture for oil demand isn’t as clear-cut in China. There have been signs for many months that a healthy portion of China’s imports aren’t actually being used by Chinese consumers. Instead, much of it is being stashed away as the country expands its strategic reserves.
The government also recently relaxed longstanding import restrictions on China’s many small, independent refiners known as “teapots.” The looser rules have juiced China’s import numbers, but much of the fuel churned out by the teapots is being spewed into the regional export market, not consumed at home.
“With regard to these very strong imports, we’re still seeing a lot of stock building in China rather than the strong oil imports being transformed straightaway into products to satisfy local demand,” said Andrew Wilson, an analyst with the IEA.
The pace of actual demand growth in China has slowed considerably, rising 3% in the first quarter after logging quarterly growth of more than 5% for much of last year, according to the IEA.
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