Reliance on imported energy, especially crude petroleum, has been one of the weakest aspects of the Indian economy for the past many decades. Though we have made significant progress in the adoption of renewable and clean sources of energy, about 70% of our primary energy demand is still met by coal and crude oil. Renewable energy meets less than 5% of the primary energy and is mostly replacing traditional biomass in the overall primary energy mix.
India meets most of its petroleum requirements through the import of crude oil. Notwithstanding the ethanol blending policy, in FY23, over 87% of the domestic petroleum consumption requirements were met through imported crude oil; up from 83.8% in FY19.
Despite incentives and many policy changes, domestic oil production in India has consistently declined since peaking in 2011. The current annual production of crude oil in India is around 620 thousand barrels a day; the same level it was in 1995-96, before the New Exploration Licensing Policy (NELP) in 1997.
Recent reports are indicating that this winter global crude prices could see a material surge. According to OPEC, the global oil demand will rise by 2.44 million bpd in 2023 and 2.25 million bpd in 2024. The US EIA also expects the oil demand to hit record highs in 2023. OPEC and allied producers like Russia persist with their production cuts of 1.3 million bps until the end of 2023. The US EIA expects global oil inventories to decline by almost half a million bpd in 2H2023, exerting pressure on crude oil prices.
The higher crude prices could impact the Indian economy adversely. Since the election season is about to begin (5 key state assembly elections in 4Q2023, followed by the general elections in 1H2024), it is highly unlikely that the government will pass the entire rise in crude prices to the consumers. The state-owned energy companies and the central government shall bear the brunt of the higher fuel prices.
Considering that the oil & gas PSUs and private refiners (through enhanced windfall tax) could be made to bear the bulk of the burden, the impact on fiscal conditions may not be significant in FY24. There could be some pressure on current account deficit
However, if the higher oil prices are sustained for longer, i.e., beyond FY24, we may see some of the hikes getting passed to consumers having a second-round impact on inflation. We may see material pressure on the current account balance, bond yields, and INR exchange rate during FY25.
Investors need to watch the developments in the oil market carefully. For me, public sector oil marketing and upstream companies are a definite “No Go” zone; while I shall be watching private refiners closely.
Insofar as Indian equities are concerned, historically their correlation with the crude has been positive.
