File photo: India oil demand to recover.
New Delhi: Indian oil demand, which faced substantial pressures in 2018 because of rising rates and a weakened rupee, is set for recovery next year, Fitch Solutions Macro Research said in a note Thursday.
"Indian oil demand will become an increasingly important driver of global demand growth, as China's economy slows and the government pushes diversification away from oil," Fitch Solutions, an affiliate of Fitch Ratings, said.
It put fuel consumption growth at 6 per cent in 2019, up from 5.5 per cent this year. The world's third largest oil consumer will, however, not be able to replicate the strength of China's demand, with growth becoming increasingly diversified across emerging markets.
Although their populations are of similar size, the scale of the Indian economy and its capacity for growth are not comparable to that of China, it said, adding that demand will become increasingly diversified across emerging markets, in particular, those in Asia.
While this will shelter prices from any "idiosyncratic shocks" to the Indian economy, the global demand growth is set to soften in both percentage and volume terms over the coming decade, dragged down by structural declines in developed markets and China, it said.
"Indian oil consumers have faced substantial pressures in 2018, from the combination of rising international oil prices and a sharp weakening in the currency. "A bruising year saw the rupee fall from around 64 to a US dollar in January to 74 rupees per USD in October," it said.
"Rising oil prices have worsened India's terms of trade and stoked inflation".
The rupee's still-high valuation, continued inflationary pressures and rising real interest rate differentials with the US will maintain pressure over 2019, but the pace of depreciation will slow.
"Our economists put the rupee at 76 to a USD at the end of 2019, up from 73 rupees to USD as of end-2018," it said.
While the combination of rising international oil prices and weakened rupee dampened if not derailed growth in 2018, Fitch Solutions was "more bullish" on demand for 2019, given supportive economic policies, currency stabilisation and a slower rise in the price of crude.
Global benchmark Brent rose from around USD 68 per barrel at the start of the year to around USD 86 a barrel at its peak in October.
Although it has since shed much of its gains (down to USD 73), Fitch Solutions forecasted a partial recovery in the coming months, pulling the contract back out of oversold territory.
"The pain for Indian consumers has been made more acute by the deregulation of diesel prices in 2014, which followed the deregulation of gasoline (petrol) in 2010.
"As a result, retail prices for gasoline and diesel are 55 per cent and 110 per cent higher, respectively, than they were in July 2008 when Brent peaked above USD 140 per barrel," it said.
Fitch Solutions said it was more bullish on demand for 2019, given supportive economic conditions, currency stabilisation and a slower rise in the price of crude.
It forecasted an annual average price of USD 81 per barrel of Brent for the year, with gains tempered by softer demand growth, rising supply from OPEC+ and pipeline debottlenecking in the Permian.
Also, the US approach to sanctions against Iran has also been less hawkish than was signalled in the run-up to November 5, which will help to contain prices.
"Indian demand is highly elastic to price and, as a result, growth fell off sharply in response to the run-up in Brent in Q3. The fundamentals, though, remain supportive, with strong economic prospects, a growing population, rising incomes and a rapid rise in vehicle sales driving up demand.
"Our economists forecast real GDP growth of 7.3 per cent and 7.1 per cent in 2018 and 2019 respectively, while our autos teams put vehicles sales growth at 14.0 per cent and 12.3 per cent over the same period.
"These growth rates are robust and the slowdown in both will be comfortably offset, in our view, by the stabilisation of oil in local currency terms," it said.