Podcast - Driving Discussions: The impact of Covid-19 on India and the wider products market

Автор Argus

Listen to the latest podcast in the Driving Discussions series, looking at the implications of Covid-19 on India's fuel market.

Listen to the latest podcast in the Driving Discussions series, introducing Sunita Sharma, VP – Asia Refined Products and Aldric Chew, Editor – Asia Pacific Products as they cover the impact of Covid-19 on India and the wider products market.

 

Transcript

Sunita: Hello, everyone, and welcome to "Driving Discussions." In this series, we're discussing the forces that affect road fuels globally. This series is brought to you by Argus Media, a leading independent provider of energy and commodity pricing information. In this episode, we'll be discussing the COVID-19 impact on Indian transport fuel markets. My name is Sunita Sharma. I'm Vice President for Asia Refined Products here at Argus. With me is Aldric Chew, Editor of the Asia Pacific Products report. The virus has affected commodity markets across the globe, and India, the third largest oil market in the world after the U.S. and China, is no exception. Stay tuned as we discuss the impact of the virus on India and the wider refined products markets.

Aldric: Hi, this is Aldric. The virus outbreak in India has met with a strong response from the Indian government. They shut the entire country down for 21 days from midnight on 25th April...sorry, 25th March until 14 April. India has 4281 confirmed cases with 111 deaths as of 7 April, and the number is rising fast. Could a lockdown be extended, if not wholly, then at least to a large extent? That's not unlikely given India's large population of 1.38 billion people, and also the limited testing and contact-tracing facilities and the inadequacies of the healthcare system to cope with a sustained high influx of very sick people. So, it is understandable that the government is moving to contain the spread rather than have to deal with the fallout.

Sunita: Yes, governments across the world are having to balance healthcare issues with economic interests. It's a struggle to come up with an adequate forecast on how India's oil demand will be affected by the measures the government is taking. What we do know is that oil demand was already slowing as the economy slowed. India's GDP growth was 7% last year, down from over 8% a few years ago, and the virus has slashed GDP projections this year to 2%. Aldric, let's look at the impact of COVID-19 from a refined products supply perspective. At this time, refiners in India should have been benefiting from low crude prices and the seasonal demand spike, but economic activity has halted as a result of the population lockdown and transport restrictions have cut sharply into jet, gas oil, and gasoline demand. What are you hearing from India about what is happening on the ground? Let's start with run cuts by the refiners. As with other refining centers, we know that margins are deteriorating and a products stockpile building. In Singapore today, gasoline margins are minus $11 a barrel, and gas oil is struggling under $7 a barrel? What's happening with refinery runs in India?

Aldric: Well, Indian refiners are definitely cutting runs. And we know that the country's largest refiner, Indian Oil Corporation, also known as IOC, has a combined capacity of 11 million barrels per day, across 11 refineries has cut runs by an average of 30% and possibly up to 50% at some refineries. An IOC affiliate, Chennai Petroleum has indefinitely shut two of the three CDUs, [inaudible 00:03:31] at 10,000 barrels per day refinery as demand for transport fuels evaporates during this shutdown. We know also that fellow state-owned refiner, Bharat Petroleum, also known as BPCL, with 770,000 barrels per day of refining capacity will cut runs by roughly 30%. And similarly, for 300,000 barrels per day Mangalore Refinery and Petrochemicals, also known as MRPL, they will cut runs by a third of capacity, industry sources say.

And in terms of the two private sector refiners, Nayara and Reliance Industries, we will see cuts of around 20% to 40% as domestic demand contracts. Indian refiners are indeed in a very unique situation. So, what happens is that at a depot or the supply point just before retail station, they typically carry up to about 20 days of inventory. And in case of any supply disruption from a refinery, this means there's very little spare capacity to carry additional fuel if the offtake at the retail station is affected, as has been the case now. So, refineries have to cut quickly if the downstream demand goes. And you can see that demand from consumers has fallen away very sharply. And what is also likely to happen with Indian refiners is that they'll postpone refining turnarounds starting April. So the second quarter is typically a very heavy turnaround period, but reduced operations means the refiners like MRPL, HPCL, and BPCL, who all have planned turnarounds in this period will postpone these. And actually, this year we have already seen less than a usual refinery turnaround season because these refiners, who had been preparing for BS6, also known as Bharat Stage VI, Indian fuel standards, domestic Euro 6 equivalent, has really brought refineries down much earlier in preparation for the 1st April start, and the virus has just seen refiners reduce turnarounds even further .

Sunita: Despite the refinery run cuts though, we seem to be seeing a rash of gasoline and gas oil offers from Indian refiners, not a good sign about domestic demand. Can you tell us a bit more about what we're seeing offered under spot products markets?

Aldric: That's a good point about demand destruction. So, let's take this product by product bearing in mind that the Indian government only locked down the country starting 25th March. So, Indian gasoline demand in March fell a hefty 18% from a year earlier to 529,000 barrels per day. Now, this fall is less pronounced than it could have been given that no one has been doing much driving to work or to anywhere else for that matter, but state-controlled fuel stations were ordered to stay open even after the lockdown was imposed to provide fuel for migrant laborers to return to their village. And despite the run cuts by IOC that we talked about earlier, we are seeing IOC offer about four gasoline cargoes just for April loading despite being a gasoline importer typically. And this would be the first export cargoes we have seen from IOC this year for sure. Indian gas oil has been affected even more badly. The initial numbers that we are seeing for March suggest that diesel is down 26% from a year earlier and to 1.2 million barrels per day. And as I said, this is not a comparing of the full month as the PM or the Prime Minister just made an announcement to shut down the country only on 23rd March.

So, maybe, a full week in March, where the economy was locked down, and we feel that diesel could be hit harder than that given the exports we are seeing. In terms of exports, we are seeing that Indian state-controlled refiners, IOC, BPCL, and MRPL, they've really offered more than 500,000 tons of gas oil for April loading compared to just 109,000 tons in March. But it is Indian jet fuel consumption that would have been hit the hardest. Demand in March was down 32% from a year earlier to 118,000 barrels a day. The government has banned all flights, domestic as well as international, until 14 April with 600 aircrafts grounded. Domestic flights are taking bookings from 15 April at this point, although the national carrier, Air India, is holding off until 1st May. So, India's air passenger transport...sorry, traffic growth has already been really slowing, and it was just under 4% last year. And this virus would devastate the aviation industry as it has in many, many countries now. And please bear in mind that also the two private refiners, Nayara and Reliance, typically supply to the domestic marketing companies through [inaudible 00:08:03] agreements. And it's still not clear to us, at this point, if the companies are reducing volumes they're taking in the local market, and if these volumes are also finding their way out as exports.

Sunita: So, it's not surprising then that we have seen clean product freight rate for 35,000-ton vessels rise with a surge in gasoline and gas oil exports from India.

Aldric: Yes, we've definitely seen freight rates rise generically because of higher clean product exports and increasing demand for floating storage just as the contango deepens throughout the clean product market. But when the lockdown was announced, freight for Medium Range or MR vessels was assessed at Worldscale of 164 and freight for Long Range 2 or LR2 vessels were assessed at Worldscale of 175. So, for MR rates, it started rising right after the shutdown and reached the peak last Friday at Worldscale of 200 or 36 points higher from where it started. And there are two main reasons for the sharp increase. One was, of course, LR2 rates were very high, and chartered vessels were splitting cargoes over to MR2 vessel and the other was the sheer volume of clean exports that we see from India and the Middle East/Gulf. And compounding this was slower port operation because of reduced manpower, crew quarantine, and this reduced available tonnage at any point pushing up rates.

Sunita: Aldric, I'm very curious. What has been the impact on the Indian consumer? Have we seen Indian gasoline prices crash as a result of lower international prices?

Aldric: Actually, no, not at all. So, Indian gasoline prices haven't fallen the way you might have expected despite domestic market pricing off the international market, which has fallen sharply as you point out. But this has very much to do with the taxation structure in the country. Gasoline does not come under Goods and Service Tax, but instead the central government levies a duty, and the state governments are taxed on gasoline sales, and this has gone up as the respective governments try to boost revenues at this time.

Sunita: Aldric, what could be a strong consideration, in your opinion, to make the Indian government ease lockdown restrictions, and what impact would that have on oil demand?

Aldric: India, as you know, Sunita, is primarily a agricultural economy. This is the time when winter crops such as wheat are harvested. In the northern state of Punjab, Haryana, and Uttar Pradesh, the migrant laborers has gone back, typically to east India to wait out the lockdown, So, there is a severe shortage of labor. And, of course, taking the harvest to the wholesale market and to the railways for transport across the country being affected, we should see supply chain disruptions until at least lockdown are not eased to allow labor to move to agriculture. The government is unlikely to want to see this, and if the lockdowns are partially eased, then we should see an uptick in diesel demand

Sunita: And finally, Aldric, may I ask how you see refined product demand in Asia in the second quarter?

Aldric: That's going to depend very much on how the regional management...sorry, government manage the lockdown, so how far they persist. But a rise in COVID-19 cases in U.S. and Indonesia, which are two of the world's largest gasoline markets, is definitely worrying for the traders and for the market as a whole. We have always seen the boost in gasoline prices from the US summer driving season, and also, the Islamic fasting month of Ramadan. But now, with the COVID-19 spreading across these two countries, that is weighing heavily on the gasoline market. So, Indonesia, usually a massive gasoline importer at 10 million barrels a month on average, has already reported a 60% drop in both gas oil and gasoline demand so far. Philippines and Vietnam, they're both typical net importers of gasoline, but they have been seen offering oil products into the market for April loading. And, of course, other major gasoline importers such as Pakistan and Sri Lanka have really been canceling April delivery cargoes. And, of course, just across the month or across a few weeks, we have seen Vietnam and then Thailand announce restrictions on movement. And Malaysia has extended its lockdown. And in Singapore, we've stepped up all measures. Japan has imposed a state of emergency in some areas as we speak. And China is coming back slowly, but we still see gas oil and gasoline in steep contango with Prom gas oil and gasoline trading at a significant discount through forward months reflecting the significant weakness in the markets we are currently in. But it's not likely we're going to see a V-shaped recovery in oil product demand even if the destruction [inaudible 00:12:41]. We truly expect that the impact of this virus is going to shackle economic activity for some time. And, of course, the ultimate difficulty, of course, is that we have no end date in sight.

Sunita: Thank you, Aldric. And thank you, of course, for tuning into our Argus podcast. If you enjoyed this podcast, please be sure to tune in for the other episodes in the "Driving Discussion" series, where we will continue to explore issues impacting global road fuel markets. And if you'd like to track the immediate fallout from the COVID-19 on the commodity markets, head over to our dedicated hub page on the Argus Media website, which is www.argusmedia.com/coronavirus. Thank you for listening .

[00:13:24]
[music]

Комментарии

Leave a reply

Required
Имя
Имя введено некорректно (возможно введение только букв без символов )
Фамилия
Фамилия
Комментарии