Crude boost for India Inc as global oil demand dips

Crude-dependent sectors like aviation could gain from drop

NEW DELHI: The sluggish Indian economy and industries that are heavily dependent on crude oil such as aviation, shipping, road and rail transportation are likely to gain from a sudden drop in crude oil prices due to the coronavirus epidemic in China, the world’s biggest oil importer, economists, chief executives and experts said.

With various industries realigning their strategy amid energy demand forecasts being slashed due to the coronavirus outbreak, major oil importers such as India are seeking to drive a better bargain. India is the world’s third-largest oil importer and the fourth-largest buyer of liquefied natural gas (LNG).

The oil market is currently facing a situation called contango, wherein spot prices are lower than futures contracts.

“Estimates by several agencies are suggesting that Chinese Q1 crude demand will be down by 15-20%, resulting in a contraction of global crude demand. This is reflecting in the prices of crude and LNG, which are both benign for India. This will help India in its macroeconomic parameters by containing current account deficit, maintaining stable exchange regime and consequently inflation,” said Debasish Mishra, partner at Deloitte India.

The International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (Opec) have cut global oil demand growth outlook following the coronavirus outbreak.

“Sectors such as aviation, paints, ceramics, some industrial products, etc, would benefit from a benign price regime,” Mishra added.

India is a key Asian refining hub, with an installed capacity of more than 249.4 million tonnes per annum through 23 refineries. The cost of the Indian basket of crude, which averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively, averaged $65.52 in December 2019, according to data from the Petroleum Planning and Analysis Cell. The price was $54.93 a barrel on February 13. The Indian basket represents the average of Oman, Dubai and Brent crude. “In the past, benign oil price has seen airline profitability improving significantly,” said Kinjal Shah, vice-president of corporate ratings at rating agency Icra Ltd.

“This could be a good time for airlines to make up for the losses. Airlines can use this to recoup losses, while travellers can use this moment to plan for travel as the cost of air tickets would become more pocket friendly,” said Mark Martin, founder and CEO at Martin Consulting Llc, an aviation consultant.

The outbreak of coronavirus in China has forced energy firms there to suspend delivery contracts and reduce output. This has impacted both global oil prices and shipping rates.

Officials at the Indian Chemical Council said India depends on China for chemicals across the value chain, with that country’s share in imports ranging from 10-40%. The petrochemical sector serves as the backbone for various other manufacturing and non-manufacturing sectors such as infrastructure, automobile, textiles and consumer durables.

“A wide variety of raw material and intermediaries are imported from China. Though, so far, companies importing these are not significantly impacted, their supply chain is drying up. So, they may feel an impact going forward if the situation does not improve,” said Sudhir Shenoy, country president, CEO of Dow Chemical International Pvt. Ltd.

Madan Sabnavis, chief economist at Care Ratings, said lower oil prices has been a blessing for India. “However, upward pressure cannot be ruled out with some cuts expected by Opec and other exporting countries.

Ravindra Sonavane, Kalpana Pathak, Asit Ranjan Mishra, Shreya Nandi, Rhik Kundu, Navadha Pandey, Gireesh Chandra Prasad contributed to this story.