Monsoon in India expected to wash away diesel demand surge

Use of diesel for irrigation pumps and generators to be cut, potentially rejuvenating exports of the product

India's monsoon is expected to dump above-average rainfall on the South Asian nation after two years of drought, cutting its use of diesel for irrigation pumps and generators over the third quarter and potentially rejuvenating exports of the oil product.

India is a net exporter of diesel - which accounts for about 40% of its oil demand - but a jump in imports by state refiners since April helped erode an Asian surplus of the fuel, lifting its regional profit margins to the highest for the year so far at the end of May.

The state refiners ramped up diesel imports in the second quarter after supplies from private oil processors Reliance Industries and Essar Oil became too expensive in the absence of discounts on taxes and shipping.

 

Now, as the rains come and domestic demand drops, diesel imports could halt and exports rebound.

"During the monsoon demand for diesel sees a blip (down) because industrial activity slows, transport movement gets affected and demand from agriculture also reduces," said Tushar Bansal, a Singapore-based senior consultant at energy consultancy FGE.

India's weather office has forecast above-average rains in the four-month season from June. The monsoon rains are crucial for India's farmers, which otherwise use diesel-powered pump-sets to draw water to irrigate their land. 

Officials at Indian state refiners, which dominate the local retail fuel markets, said they also see diesel demand softening during the monsoon season.

"Major construction activities including road construction virtually stops during rains, so there is bound to be an impact on diesel demand," said Y K Gawali, head of marketing at Hindustan Petroleum Corp .

More rain also boosts hydropower generation alleviating electricity shortages and reducing demand for diesel to power small diesel generators to keep lights burning.

"We have seen very high diesel demand in April-May. In June also it is rising. But I expect diesel demand (in the third quarter) to be 50% of the April-June quarter," Gawali said.

A sustained rise in diesel prices as oil markets recover this year is also putting further pressure on diesel demand.

Diesel-fuelled vehicles - which were supposed to one of the driving forces behind rising consumption in India - are as well faced with court bans over pollution concerns, prompting some automakers to redraw engine production strategies.

Lower diesel consumption means state refiners will take less from private and standalone refiners such as Mangalore Refinery and Petrochemicals Ltd and Chennai Petroleum Corp Ltd to meet demand.

"To that extent diesel exports will go up. Refiners normally don't take maintenance shutdown during rains so output is normally higher and that also boosts exports," Gawali said.

Last year, India's diesel demand grew at an annual 8% during the July-September quarter, according to data posted on a government website.

This year, FGE estimates, annual diesel demand for the third quarter could grow just around 1% from a year ago to about 1.4 million barrels per day.