After a drop of 9.3 per cent year-on-year (YoY) in the financial year 2021 (FY21), demand for petroleum products is estimated to grow 6-8 per cent YoY in FY22, supported by expected revival in demand across end-user industries, especially in personal mobility.
Demand is expected to increase further by 6-8 per cent in FY23, driven by healthy demand growth in the liquid petroleum gas (LPG) and naphtha segments.
Demand for petroleum products grew 7 per cent from April to November 2021. Recovery in demand had slowed in May and June because of the second wave of the pandemic that led to restrictions being imposed across many states. However, demand recovery gained momentum from July. In fact, petrol demand reached an all-time high in October 2021, as festivals boosted mobility and economic activity. Preference for personal mobility may continue in the second half of FY22, driving petrol consumption. That said, the spread of the Omicron variant of coronavirus and restrictions to contain it remain a monitorable.
Demand for most petroleum products other than diesel and aviation turbine fuel (ATF) is likely to recover to pre-Covid levels in FY22. Recovery in diesel demand is slower than anticipated at 9 per cent YoY (April-November), against a decline of 19 per cent in the corresponding period last year. Subdued demand amid the second wave and the monsoon season capped growth.
Meanwhile, a cloud of uncertainty continues to loom over ATF. While consumption of ATF will increase on a low base, complete recovery to pre-Covid levels may only happen after FY25.
Demand for petrol and diesel is expected to increase 4-5 per cent in FY23. A higher growth trajectory is unlikely because of the government’s thrust for electric vehicles, compressed natural gas, and ethanol blending. Furthermore, improving fuel efficiency and urban infrastructure development such as the metro railway projects are also likely to affect petrol consumption. Demand for LPG is expected to grow 1-2 per cent YoY in FY22, given a high base in the previous year. A further increase will be limited, considering the sharp spike in LPG prices and the absence of subsidies by the government. LPG volumes are expected to rise 6-8 per cent next year, aided by the government’s continued focus on increasing penetration of LPG in rural areas, coupled with higher industrial consumption as LPG is likely to be more competitive vis-à-vis PNG.
Oil prices
This calendar year, crude oil prices surged over 70 per cent to $71 per barrel from $42.3 per barrel in 2020. In the first half of 2021, oil prices had already risen 57 per cent to $64.6 per barrel, led by continued restrictions on production from the Organization of the Petroleum Exporting Countries+ (Opec+) members. Prices increased by a further 75 per cent YoY in the second half, led by a gradual recovery in oil demand.
Prices of alternative fuels such as coal and natural gas also rose because of supply constraints. As a result, crude oil prices skyrocketed to average around $84 per barrel in October. But the rising caseload of the Omicron variant dampened crude prices in November and December, leading to concerns over sustained recovery.
In CY22, with growth in production from Opec+, the US, and from other non-Opec countries expected to outpace slowing growth in global oil consumption, crude oil prices are expected to fall from current levels of $75-80 per barrel to average around $68-73 per barrel, back to levels seen in 2021.
Credit quality
With the expected recovery in demand for petroleum products, the credit profiles of oil refiners and oil marketing companies (OMCs) will remain stable over the near-to-medium term. This is in line with CRISIL’s analysis of public sector refineries and OMCs, which have 65 per cent share of refining capacity and 90 per cent share of oil marketing in India.
To be sure, the oil refining and marketing firms are expected to see a rise in debt levels in two years through FY23 owing to the ongoing and planned capex of around Rs 1 trillion. This will result in moderation of debt/Ebitda as a large chunk of this capex would be commissioned in 2025, and so, the incremental cash accruals would be visible only after FY25.
Despite the moderation, interest cover ratio and gearing will remain within a comfortable range during the period through FY23. Therefore, the healthy balance sheets of these firms, combined with their expected strong operating performance, will lend stability to the overall credit metrics of the sector over the near-to-medium term. Additionally, the ratings factor in support from the government owing to the latter’s majority ownership in these firms and the sector’s criticality to the economy.
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