India's fuel demand will continue to recover through this quarter: Fitch

India's fuel demand will continue to recover through the current quarter as the easing of Covid-19 pandemic-related restrictions boosts economic activity, Fitch Ratings said on Monday, adding a caveat that this was subject to the risk of a resurgence in infections and the resultant impact on economy and mobility.

The recovery should support higher throughput at most oil marketing companies and strong prices are expected to improve the financial profiles of upstream oil and gas companies.

Fitch said it "expects India's petroleum product demand to remain moderately strong in the fourth quarter of the financial year ending March 2022 (4QFY22), as the easing of Covid-19 pandemic-led restrictions boosts economic activity."

However, recovery expectations remain subject to further restrictions due to the risk of a resurgence of Covid-19 cases in India with the emergence of new variants, even as the country makes progress in its vaccination plan.

 

"We expect improved demand for petroleum products to reach pre-pandemic levels in 4QFY22 (January-March 2022), but the full financial year's demand is still 2-4% below that in FY20," Fitch said.

Demand rose by 5% yoy in April-December 2021, but the overall monthly average was about 8-10% lower than the pre-pandemic level at 16.4 million tonnes. This is because there were still some pandemic-related restrictions in some regions of the country in 1HFY22.

"We expect the recovery to continue through to 4QFY22, subject to the risk of a resurgence in Covid-19 cases and the resultant impact on economic activity and mobility," it said.

In its 'India Oil & Gas Watch' report, the rating agency said capex is likely to stay high as oil marketing companies (OMCs) expand their refining capacity and retail networks, and upstream companies enhance production.

"We expect stable crude oil production, which should marginally increase in FY23 as upstream producers continue to invest in exploration and development," it said. India's natural gas production increased by 22% yoy in April-December 2021 and the momentum is likely to continue over the next 12-18 months, driven by expanded production at new fields, before stabilising in FY23.

"We believe rising domestic production and higher liquefied natural gas (LNG) spot prices are likely to weigh on LNG imports through to 1HFY23. However, LNG imports should rise steadily over the medium-term as consumption picks up pace," it said.

Core oil refining margins are likely to improve in 2HFY22 (October 2021 to March 2022), as petrol and diesel spreads continue to strengthen amid the economic recovery. The 1HFY22 (April-September 2021) reported margins of BPCL, IOC and HPCL improved to USD 5.1 per barrel, USD 6.6 and USD 2.9 a barrel, respectively, on account of rebounding demand, wider gasoline spreads and inventory gains.

"We expect the OMCs to generate steady marketing margins in 2HFY22, as they continue to pass on higher crude oil prices to consumers," Fitch said.

"Government cuts to gasoline (petrol) and gasoil (diesel) excise duties, as well as to value-added tax in some states, should cushion retail fuel-price affordability and the OMCs' marketing margins."

However, record-high retail fuel prices may limit the extent to which the changes are passed on should the crude oil prices continue to rise, it said.

India's crude oil production declined by 3% year-on-year in April-December 2021, while natural gas production rose by 22%.

The steep rise in gas output was due to a production ramp-up at the KG-DWN-98/2 and KG-D6 deepwater projects. Natural gas production to further increase over the next 12-18 months, driven by expanding production at the new fields, before stabilising in FY23.

"Crude oil production should stay stable in 4QFY22, before marginally increasing as upstream producers continue to invest in exploration and development and enhance existing facilities to offset the natural decline from mature fields," Fitch said.

The government increased the domestic gas price at the last October 2021-March 2022 reset to USD 2.9 per million British thermal units (mmBtu), from an all-time low of USD 1.8 in April 2021-September 2021.

The price is linked to prices of four global liquefied natural gas (LNG) benchmarks, including Henry Hub and National Balancing Point, in the previous 12 months and is implemented with a quarter's lag.

Global gas prices rose during 2021 and we expect global prices to stay high in 1Q22, driven by high demand in Asia, production bottlenecks and uncertainty around Russia's Nord Stream 2 pipeline as well as limited gas in European storage facilities.

This is likely to result in higher domestic gas prices during 1HFY23, helping boost profitability at upstream companies. However, the impact on upstream companies will be marginal, due to its low share in the revenue mix, Fitch said.

The government's higher price ceiling for gas produced from deepwater and other difficult fields of USD 6.13 per mmBtu, from USD 3.62, is likely to benefit production at Reliance Industries Ltd's Krishna Godavari basin field.