If oil prices are to continue their strong rally, they will have India to thank.
India has emerged as the “star performer” of the oil markets, the IEA wrote in its May Oil Market Report. Oil demand growth in India has surpassed that of China, the long-time cornerstone of global commodity demand.
Part of India’s sudden importance has to do with China. Demand growth for refined fuels in China plunged recently, down to 353,000 bpd in the first quarter of 2016 from a year earlier. That is down roughly 60% from a highpoint in the third quarter of last year at nearly 900,000 barrels per day (elevated levels that had a lot to do with filling of China’s strategic petroleum reserve).
But India’s demand for liquid fuels grew by 400,000 bpd in the first quarter, which was the fastest in the world, accounting for about 30 percent of the total global increase. “This provides further support for the argument that India is taking over from the China as the main growth market for oil,” the IEA wrote in May. That level of growth is all the more remarkable given that India’s oil demand grew at an average of just 120,000 bpd every year for the past decade, according to Bernstein Research.
The growth figures in India are striking: GDP is expanding at a 7.6% annual rate, gasoline demand is up 14.5%, and diesel demand is up 7.5%. The WSJ reports that 24 million new vehicles were constructed in India in the most recent fiscal year, and the government is targeting new road construction on the order of 30 km every single day. India’s vehicle fleet has doubled since 2007.
To fill all of those vehicles, India needs more oil. And with domestic production relatively stagnant, India has to resort to steadily higher imports. Crude oil imports have jumped by 12% so far this year from 2015 levels. Domestic refineries are running full tilt, and more capacity is needed.
According to Bernstein’s Neil Beveridge, India is at a “structural inflection point for oil growth,” with several factors responsible for the surge in demand: the government program to rapidly expand the nation’s highway system; rising per capita income; and a shift towards building out manufacturing capacity to make up a larger share of the Indian economy.
India is now more or less at the same per capita income levels as China in 2002 – a time when China’s demand for oil and other commodities started to skyrocket. Bernstein sees India undergoing a similar, if less intense, industrialisation and economic transformation. Oil consumption could grow at a 5.4% compound annual growth rate through 2021, or an increase of 1.45 MM bpd) over the next five years to 5.45 MM bpd. by 2040, India’s oil demand could rise to 10 MM bpd, a more than 6 MM bpd increase from today’s levels, which will also be the largest source of growth on the planet.
In other words, India is simultaneously contributing to oil demand in today’s oil market, putting a floor beneath prices, while India will also be the largest driver of oil demand over the long-term. China was largely responsible for the commodity super-cycle that began in the early 2000s that ended a few years ago. Companies that spent billions on coal mines in Australia, copper mines in Chile, or drilled oil wells in increasingly hard-to-reach areas of the globe – they all had China in mind when they put together their forecasts. But going forward, India will increasingly play that role.
And the next bull market could be starting sooner than many think. Bloomberg reports that commodity markets are about to enter bull market territory, as the Bloomberg Commodity Index – which tracks 22 different raw materials – is about to close up 20% from January levels. To be sure, the super-cycle price boom of a decade ago is not about to return, but the bear market has come to an end. The fortunes of commodity producers now rest with India.
Nick Cunningham, Oilprice.com, 8 Jun 2016
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