High Price may Curb Oil Demand

Consumption contracts in February amid economic slowdown and a drastic fall in purchases by bulk diesel buyers

    India’s oil consumption is expected to remain sluggish after contracting in February, the first drop in nearly two years, because of higher prices, economic slowdown and drastic fall in purchases by bulk diesel buyers who have been charged market rates since January. Diesel sales, which account for more than half of oil products sold in India, dropped 2% in February compared to a year ago, going in reverse gear after galloping for four years. Lower automobile sales and slowdown in aviation also contributed to the slack demand. Analysts said that while falling oil demand reflected a weak economy, it would also reduce the subsidy bill, and higher prices will encourage energy efficiency.
“The total consumption for the month of February, 2013 has been the lowest and first time negative, in the last 23 months,” Government’s data-keeper Petroleum Planning & Analysis Cell (PPAC) said in its latest report.
India’s economic growth in 2012-13 is expected around 5% but the growth in the third quarter was only 4.5%, the lowest in a decade. “There are no immediate signs of faster growth in near terms, hence, consumption growth of petroleum products are expected to remain low for quite sometime,” one official said requesting anonymity. In the third quarter, the country’s economic growth was slow because of slump in farm, mining and manufacturing output. While Feburary sales drop compares with a 29-day month in 2012, a leap year, analysts said the demand was shrinking. “Rising domestic prices and slowing down economic activity are putting pressure on domestic petroleum consumption. A reduction in petroleum consumption is good for the economy since it reduces the fuel subsidies as well as improves current account deficit,” said Debasish Mishra, senior director at Deloitte Touche Tohmatsu India. Arvind Mahajan, head of energy & resources, KPMG in India said there were multiple factors behind the fall in demand. “While it is true the economic growth rate is slowing down, a part of the demand is also impacted due to rising prices and the need to conserve.
In a way this is good because ultimately it will improve focus on efficiency in the long term and improve the domestic current account deficit apart from lowering the fuel subsidies,” said Arvind Mahajan, head of energy & resources, KPMG in India. "One needs to watch if this translates in a consistent trend. But one thing is for sure that there is a slowdown in domestic consumption," he added According to oil industry officials, bulk diesel sale had dropped by about 40% in February and the trend would continue. Bulk diesel, which accounted for 18% of India’s 70 million tonnes annual diesel consumption, saw a drastic fall within a month after the government changed its pricing system. The price of diesel for consumers buying directly from oil marketing companies was raised to market levels in January.
“Most of the bulk consumers have cut down their inventories due to wide price difference between bulk and retail diesel. The high cost of diesel has forced many consumers to generate power using furnace oil,” an executive of Indian Oil Corp said. Bulk diesel was about Rs 11 per litre costlier than the fuel sold to retail consumers in February. The gap has, however, narrowed to about . 6.50 per litre in April because of drop in international oil prices.
Port traffic, which is one of the indicators of economic growth, also remained negative in February because of slowing of exports and ban on mining and the situation would not improve immediately, industry executives said. Shipping industry is one of the major consumers of diesel. Of the 12 major ports in the country five have recorded negative growth in port traffic led by Marmugao (-52.6%), Vishakhapatnam (-13.3%), and Kolkata (-10.1%). 
The report says that petrol consumption did see 4.2 % growth in February but slowdown in sales of passenger vehicles could pull down its consumption in near future. Total passenger vehicles sales in February -16.1% growth.
“The price of diesel, which represents nearly 45% of overall domestic consumption, has increased considerably in last few months. Similarly, petrol prices have increased, while reduction in airline capacity has reduced ATF consumption. Industrial consumption, transportation requirements are falling due to the slowing economy. Thus there is overall pressure on petroleum demand,” mentioned Rahul Prithiani, Director, CRISIL Research. “The consumption growth will remain subdued if things don’t improve in FY14,” he added.