How India's Covid-19 surge will affect the energy industry
New movement restrictions could slash up to 600,000 bpd from overall road fuel demand and up to another 100,000 bpd from jet fuel
As India battles the world’s worst coronavirus surge, the country is literally running short of oxygen. Across the Himalayas, the Chinese economy has returned to being the world's growth engine. A full recovery of the global energy industry needs both the Asian giants operating at full steam.
India recorded about 350,000 new Covid-19 cases on Saturday, three times the amount South Korea has experienced from the onset of the pandemic. Crematoria are overwhelmed and their structures are literally collapsing under the strain. Deaths are probably heavily under-reported. Meanwhile, election campaigns and mass rallies go on in five regions, the Kumbh Mela religious gathering is proceeding and the Indian Premier League cricket tournament is being played around the country, albeit with no public spectators.
New Delhi has introduced a week-long lockdown and Maharashtra will be locked down until the end of the month. Similar to what happened last April, migrant workers seeking to return home crowd bus stations, threatening further contagion. A new and possibly more infectious Covid-19 strain is circulating while only 1.4 per cent of the population has been fully vaccinated.
India is not the only hard-hit country. Iran, Brazil, the Philippines and Turkey have faced renewed waves and cases in Europe have risen recently amid a stuttering delivery of vaccinations. But as infection rates also jump in Pakistan, Bangladesh and Nepal, the subcontinent’s suffering is on a scale not observed elsewhere.
Before the latest surge in infections, India's petrol sales were about 750,000 barrels per day while diesel – which is used in road haulage, buses and trains – had 1.75 million bpd in sales. In total, this was down by about 100,000 bpd from just before the pandemic, but a sharp recovery from last April's low of 300,000 bpd of petrol and 800,000 bpd of diesel.
Now, movement restrictions threaten another slump. Along with local curfews, the UAE, the UK, the US, Canada and others have suspended flights from India. The new lockdowns could slash between 550,000 bpd and 600,000 bpd from overall road fuel demand and another 100,000 bpd from jet fuel.
Indian refiners have begun to think about cutting runs, weakening the market for physical crude based on the Dubai benchmark. This suggests that cuts in Gulf producers’ official selling prices may be required. Even in February, before the rise in infections, Indian oil minister Dharmendra Pradhan was complaining that prices were too high and said Opec’s production cuts were too steep, cramping Indian demand.
The Opec+ group holds its next meeting on Wednesday. Russian suggestions are that the discussions will focus on assessing the market, rather than revising the production plans reached at the last gathering – namely to add 350,000 bpd of supply in each of May and June, and 400,000 bpd in July. Despite US demand looking stronger, the expected losses from India are roughly equal to the extra oil planned to return over the next two months.
Optimism over vaccines, along with Opec+'s restraint, drove Brent crude prices to more than $69 a barrel early last month. Now, India’s travails remind us of how difficult a full recovery from the pandemic is.
After an initial denial, China took the virus seriously and its movement restrictions stamped out clusters of cases. East Asian neighbours Japan, South Korea, Taiwan and Vietnam, along with Australia and New Zealand, succeeded with less drastic measures.
However, past infection and vaccination rates in these countries are very low, meaning they are exposed to outbreaks if they lift quarantines and restrictions on international travel. China’s disease control chief has said the efficacy rates of local vaccines need to be improved.
Vaccinations promise a return to normality within a few months in the US, Europe and a few other countries including the UAE. But at current rates, most of the world will not attain high inoculation rates for years and will continue to export renewed infections.
The more the virus rages unchecked through India and other countries and the more large numbers of people refuse vaccination in the US or elsewhere, the greater the risk of more virulent or vaccine-resistant strains emerging. The Biden administration’s decision to prevent the export of the raw materials for vaccines is a continuation of the self-defeating “America First” approach.
The Indian calamity has three important lessons. The first is that Covid-19 is a relentless and resilient adversary. When measures are relaxed, it easily resurges. This will continue to limit a full return to economic normality and pre-pandemic levels of travel and oil consumption until a high and effective degree of vaccinations is achieved worldwide.
The longer the new abnormal persists, the more remote working, Zoom meetings and similar models become entrenched, and the more profound will be the eventual impact on oil demand.
The second is Opec+’s continuing tense task. Their monthly meetings appear to be a sensible innovation. Responding to the renewed lockdowns in the world’s third-largest oil consumer, keeping prices tolerable for consumers and monitoring an expected rebound in American demand requires near-real-time adjustment.
The third is the growing need for international co-operation. None of us is safe until all are. The US, Europe and India have all stumbled this year in their pandemic response in different ways, while China and Russia's troubled relations with the West are another obstacle.
Continuing fragmentation and isolation will mean a slow and patchy global convalescence.
Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis
Published: April 26, 2021 07:30 AM