By Jessica Jaganathan
SINGAPORE (Reuters) - A recovery in Asia's diesel demand growth is likely to be pushed back as governments of major oil consumers in the region take advantage of a tumble in oil prices to cut fuel subsidies and bolster their budgets.
A prolonged period of weak demand is expected to reduce margins for refineries that produce the transport and industrial fuel, traders and analysts said. The Asian gasoil margin is already set for its worst quarter in October-December since late 2010, according to Reuters data, hurt by slower economic growth and a supply glut from new refining capacity.
"Diesel demand will continue to be weak in 2015 and we see a slight rebound in 2016 overall in Asia, but we are not positive on diesel growth next year and price deregulation is not going to improve matters," said Sri Paravaikkarasu, an analyst at energy consultancy FGE.
India's government removed diesel price controls this month, following a 25 percent fall in global oil prices since June, while Indonesia's new President Joko Widodo plans to order the steepest rise in subsidised fuel prices in nine years.
Cutting subsidies would normally increase prices, lowering demand. Given current low prices, cutting subsidies may not have immediate impact on demand - Indian diesel prices will actually be about 6 percent lower - but demand could turn south once oil prices rise, analysts said.
Indonesia is Asia's third-largest importer of diesel, while India is one of the region's top diesel exporters.
INDONESIA PRICE HIKE
Widodo aims to raise the gasoline price in Indonesia by 46 percent, and diesel by 55 percent in a move that will save the government nearly $13 billion a year, an adviser told Reuters.
Diesel demand has been falling in Indonesia since the country first hiked diesel prices by more than 20 percent in 2013, and has been hurt also by a mining slowdown and the mandated use of biodiesel.
Although Widodo's minority coalition may face some difficulties on subsidies, sentiment will be affected by the proposal, JBC Energy said in a market note.
"The news will certainly prolong the current weakness in the middle distillates market for much longer, even if Indian price cuts boost short-term consumer sentiment and the Indonesian government fails to raise domestic prices," it said.
Indonesia's diesel demand is expected at about 270,000 bpd in 2014, according to JBC Energy, and about half of that is currently subsidised.
Diesel demand in Southeast Asia's biggest economy is expected to decline by 3.5 percent in 2015 and 3.3 percent in 2016, after falling 6.9 percent this year, FGE's Sri said.
Despite moves to further raise prices, full deregulation may not happen in Indonesia until 2020, said Sushant Gupta, an analyst at energy consultancy Wood Mackenzie.
He estimated full deregulation would cut road demand for diesel and gasoline by 70,000 barrels per day (bpd).
INDIA DEMAND CUTS
In India, where diesel use makes up nearly half of fuel consumption, about 40,000 to 50,000 bpd of diesel demand growth has been cut since September, 2012, Gupta said.
The growth rate for diesel vehicles had slowed because diesel's price advantage over gasoline had narrowed, he said.
Since late 2012, India has implemented various reforms to its fuel subsidy programme, including allowing oil companies to increase diesel prices incrementally and withdrawing subsidies on diesel sold in bulk.
India's diesel demand could still grow by 2.4 to 2.8 percent next year from 1.1 to 1.5 percent growth this year as Prime Minister Narendra Modi looks to boost the manufacturing sector to generate growth and jobs, analysts said.
However, this was still well down on growth of more than 8 percent as recently as 2012.
(Editing by Richard Pullin)
