Photographer: Dhiraj Singh/Bloomberg

Oil Market’s New Engine Losing Steam on Modi Cash Crackdown

Updated on
  • Slowing Indian economy will impact oil demand growth: FGE
  • Diesel demand could fall as much as 12% in December: Ivy

Oil demand growth in the world’s fastest-growing crude market may weaken as the government’s cash crackdown slows the economy.

Diesel and gasoline use, which account for more than half of India’s oil demand, will slow or contract this month and possibly early next year, according to Ivy Global Energy Pte., FGE and Centrum Broking Ltd. Expansion in the world’s fastest-growing major economy is widely expected to ease temporarily after Prime Minister Narendra Modi last month withdrew high-value currency notes in a country where almost all consumer payments are in cash.

“As the Indian economy largely depends on various cash-intensive sectors, the demonetization saga will no doubt slow down economic growth in the near term,” said Sri Paravaikkarasu, head of East of Suez oil at FGE in Singapore. “Moving into the first quarter, an expected slowdown in the economic growth should marginally drag down oil consumption, particularly that of transport fuels.”

India’s $2 trillion economy imports more than 80 percent of its crude requirement and the International Energy Agency expects it to be the fastest-growing consumer through 2040. At a time when oil prices have hovered around $50 a barrel, the slowdown of a key demand center may take some steam out of an Organization of Petroleum Exporting Countries-driven price rally after the group approved its first supply cut in eight years.

Brent crude, which added 15 percent last week, lost 0.9 percent to $53.97 a barrel at 12:17 p.m. Singapore time on Monday.

Diesel consumption could fall as much as 12 percent and gasoline demand as much as 7 percent this month, according to Tushar Tarun Bansal, director at Ivy Global Energy.

“I expect to see a much smaller growth in diesel demand of about 2 percent in the first quarter,” Bansal said. “But as the year ticks on, growth is expected to pick up further and normalize in the second quarter.”

Scooters, Motorcycles

The possible slow down this month and into next year is a reversal of the demand spike seen in November as people rushed to fill their tanks to take advantage of a rule allowing fuel retailers to accept the banned 500 and 1,000 rupee ($15) bills until Dec. 2.

Gross domestic product, which grew a slower-than-estimated 7.3 percent in July to September, will slump to 6.5 percent over the next quarter, according to the median estimate in a Bloomberg survey of 14 economists. A private gauge also signaled a slowdown in India’s manufacturing in November, the first economic indicator since Modi’s Nov. 8 decision.

Sales of scooters and motorcycles, one of the key drivers for gasoline demand, have also taken a hit. India’s second largest two-wheeler manufacturer Bajaj Auto Ltd. said its local sales fell 10.3 percent in November, while sales at India’s largest sport utility vehicle-maker Mahindra & Mahindra Ltd. declined 22 percent in November.

“Domestic fuel consumption will certainly come off this quarter,” said Sachin Mehta, analyst at Centrum Broking. “The impact could remain for two months or so. This is a momentary phenomenon.”

(Updates with oil price in fifth paragraph.)
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