Editorial

How will India’s extended lockdown impact the energy sector?

Our experts unpack the effect of the coronavirus crisis on the world’s fifth-largest economy

With analysis from Gavin Thompson, Sushant Gupta and Vidur Singhal

All world leaders have to make difficult decisions right now. But in India, the need to strike the right balance between containing the spread of coronavirus and reducing the economic impact on its 1.3 billion citizens is particularly acute.

India’s economy was already slowing before the coronavirus crisis. And the lockdown – initially for three weeks, but since extended – has had an immediate and material impact on the country’s energy and natural resources sectors, which are essential to support the country through the crisis.  

Listen as Gavin Thompson, Vice Chair of Energy in our Asia Pacific region, interviews our expert team about how the pandemic will affect India’s energy sector. Fill in the form on this page to download the webinar. Or scroll down to get our top three takeaways.

 

Together, China, India and Southeast Asia are expected to contribute over two-thirds of global demand growth. What happens in these markets is critical to determining future power market trends.

1. Last hope for global oil demand growth fading with India’s extended lockdown power

Pre-coronavirus, India was expected to be the world’s second-largest centre for oil demand growth in 2020, overtaking China. And in the pandemic’s early stages, the country was the last hope for global oil demand. But India’s strict containment measures, first implemented on 24 March, have suspended virtually all travel. Meanwhile, industrial and commercial activities have come to a grinding halt. 

As a result, Indian oil demand is now forecast to halve in April. Demand for all transport fuels will be hit hard. Diesel volumes, which make up a large chunk of India’s normal 5 million barrels per day of oil, will reduce significantly.

While some businesses will be allowed to restart after 3 May, the recovery process will be gradual. As lockdown restrictions are eased, oil demand will improve slowly, but the coronavirus crisis will put a dent of 7% in Indian oil demand this year. 

 

India’s 2020 refining margins are forecast to be at their weakest for the last 20 to 25 years.

Sushant Gupta

Research Director – Asia Pacific, Refining and oils market

Sushant has over 15 years of experience with strong focus on refining, crude oil and chemicals industry.

View Sushant Gupta's full profile

Ultimate stress test for refiners

Refiners were supposed to get a boost this year off the back of the International Maritime Organisation (IMO) 2020 regulations on cleaner shipping fuel. But the coronavirus pandemic has changed refineries’ fortunes.

With very little demand for oil, refiners are now under severe pressure and are reducing crude runs as they try to adjust. We now expect margins to be their weakest in 20 to 25 years.

India’s crude runs are set to decline by 1.9 million barrels per day in April. The country’s state-owned firms (PSUs) are most exposed to the weakened domestic demand. With limited access to export markets, they will be the hardest hit.

2. Can LNG imports get back to pre-lockdown levels? 

Before lockdown took effect, LNG demand within India grew at record levels. Low LNG spot prices had triggered a buying frenzy. Even price-sensitive sectors such as power generation recorded strong growth. India's increased spot purchases were a rare glimmer of hope in the increasingly oversupplied LNG market.  

While industrial LNG demand has slowed down significantly during lockdown, we believe there will be a V-shaped recovery from mid-June. And with LNG prices set to fall further from July, it will continue to be a competitive fuel. 

3. Will coronavirus put the brakes on the energy transition in India? 

India has previously invested in renewables with a focus on affordability, security and the environment. But the financial distress of state distribution companies has affected the returns on renewable projects, leading to credit downgrades. As the Indian economy recovers from the economic impact of the coronavirus, what are the opportunities for renewables? 

The drop in power demand as a result of the crisis will hurt renewables. Any emerging energy technologies will require government subsidies if they are to succeed. The economic turmoil post Covid-19 is likely to stretch the Indian government’s ability to provide this kind of support. 

And unless new government support is provided, the pace of the energy transition will slow. 

 

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