Even if the OPEC+ coalition manages to remove as much as 2.1 million barrels of oil per day from the market in the first quarter next year, oil prices may not move much higher if demand growth in key importing countries continues to stutter.
China’s oil demand growth has largely driven the weaker global growth this year, with imports hitting a record last month.
But the world’s second most important demand growth driver and the third-largest oil importer, India, has seen oil demand growth faltering amid an economic growth slowdown that has now continued for sixth consecutive quarters.
OPEC+ cuts or not, if India’s economic growth doesn’t rebound in coming quarters, global oil demand growth could still be weaker than forecast. This, combined with expected more than 2-million-bpd supply growth from non-OPEC countries not part of the OPEC+ deal in 2020, could continue weighing on oil prices, especially if a trade deal isn’t reached and economies in Asia continue to suffer.
If India’s economic growth picks up pace next year, it could help oil demand growth locally and globally and could be a key factor in bringing the oil market back to balance, according to Reuters market analyst John Kemp.
Over the past decade, India has been the second-largest contributor to the world’s yearly oil demand growth, second only to China.
Oil consumption in India grew by 4.8 percent between 2007 and 2017. Last year, oil consumption increased by 5.3 percent and exceeded 5 million bpd, as per the BP Statistical Review of World Energy 2019.
This means that India added 200,000 bpd of incremental oil demand every year over the past decade, according to Kemp.
This year, however, India’s economic growth has slowed down and is going through its worst slowdown streak in nearly a decade. In the July-September quarter, India’s annual economic growth slowed to 4.5 percent for the weakest growth since 2013.
India has now seen six consecutive quarters of slowing growth quarter on quarter. If this quarter’s economic growth falls below 4.5 percent, it will be India’s worst run in economic growth in 23 years—since 1996, when India began publishing quarterly data on its gross domestic product (GDP).
Economic growth slowdown impacts industrial activity as well as the consumer choices of buying cars, for example.
The slowdown is evident in car sales. Passenger vehicle sales slumped by 18 percent and commercial vehicle sales plunged by 22 percent in April-November 2019 compared to the same period last year, the Society of Indian Automobile Manufacturers said this week.
Apart from a telltale sign of economic growth slowdown, double-digit declines in vehicle sales also directly impact oil consumption.
Platts Analytics sees this year’s oil demand growth in India at 120,000 bpd, the slowest growth rate since 2013 and below the 200,000 bpd average growth over the period 2011 to 2018. Next year’s demand growth is likely to pick up to 170,000 bpd, according to Platts Analytics.
Yet, the growth rate will still be lower than this decade’s average and if India’s economic growth doesn’t rebound soon, potential weaker demand in the second-largest demand growth driver doesn’t bode well for the oil market and oil prices next year.
The Asian Development Bank (ADB) revised down this week its economic growth forecasts for a number of Asian economies, as growth in the biggest economies China and India slows.
India’s GDP growth is now seen at 5.1 percent in the fiscal year 2019, which ends in March 2020, compared to the bank’s September forecast of 6.5 percent growth in FY 2019. Growth in FY 2020 is seen picking up to 6.5 percent, but the forecast was slashed from the 7.2 percent projection made just three months ago. Private consumption expansion has weakened and investment growth has slowed over the past year, ADP said.
The currently low oil prices could help India’s economic growth to rebound, but the more important factors underpinning the economy will be government policies in recent months, including a corporate tax cut, divestment from some state-owned enterprises, capital injections into public banks, and several policy rate reductions by a total of 135 basis points.
“Growth in FY2020 is likely to recover thanks to this support, low oil prices, and a weakening rupee, but risks to the projections remain tilted to the downside,” ADB said.
Yet, if India’s economic growth recovers from the current slowdown, the world’s third-largest oil importer could play its role in propping up global oil demand growth.