MC Interview | Crude prices will remain at current levels, India’s imports will rise: IEA oil markets head

The IEA report says India would be the largest global oil demand growth driver through 2030…

Yes, from now till 2030, India will be the largest source of oil demand growth, globally. We expect Indian demand to grow by 1.2 million barrels per day, which is about a third of the global total. What we have seen is that the energy crisis has accelerated supply concerns. So, many countries are taking steps to reduce oil demand growth.

They are also doing this due to an increase in climate ambitions. In developed countries and in China, we are seeing oil demand peaking this decade. Global oil demand growth would peak this decade. But India will continue to grow because of its very strong economic growth, industrialisation, urbanisation, and a very young and growing population. India would really become the largest source of growth, overtaking China in terms of annual demand by 2027-2028.

Have you studied more granularly what are the key drivers behind India’s growing energy demand?

Gasoline/diesel was really the strongest growth area, accounting for almost half of India’s oil demand growth now. It is not just industrialisation, but also continued growth in agriculture, and growth in trucking and movement of goods that’s driving demand. As opposed to gasoline, we see a much smaller growth for diesel, and that has to do with the developments in the transport sector.

We see electrification, especially of two- and three-wheelers, having a bigger impact on gasoline and diesel. For now, we have seen a very small uptake of electric vehicles for the car fleet. Only 5 percent of electric vehicle sales last year were cars, almost 60 percent for two-wheelers and roughly 40 percent for three-wheelers.

This is really skewing demand growth towards diesel as opposed to gasoline. There’s also a very strong growth that you have in biofuel production in India.

India is now the third-largest producer and consumer of ethanol globally. Production tripled over the last five years. And we see continued growth. India has moved forward to 20 percent blending target. It is at 12 percent now, but, moving forward, there will be challenges in feedstock.

We do see continued growth, and that has a bigger impact on the gasoline market because of ethanol and gasoline blending. We are seeing quite significant efficiency improvements in the vehicle fleet for gasoline cars, more than for diesel. The other strong source of growth is the LPG market. We’ve already seen many struggles in the past decade. Clean-cooking initiatives undertaken by the government have brought LPG into a large part of the population.

There is still more growth there. There is increased demand for LPG from the petrochemical sector because projects are coming online. Lastly, we see quite a strong growth in jet fuel as per-capita air travel is very low and there is a huge potential for growth. We see a strong growth of 6 percent per year.

Is there a concern that our domestic output does not match India’s growing energy demand?

Domestic oil production in India accounts for about 13 percent of the requirements and this share will decrease in the near term. This is clear. India's import dependency will increase as refinery activity increases and new capacity comes online to meet domestic demand and also to maintain product exports.

India is a big exporter of refined products, both to Asia and the Atlantic basin. There is an increased dependence on imports, especially in the backdrop of the rising geopolitical tensions, not just between Russia and Ukraine, but also in the Middle East.

These are the two largest crude-oil supplier regions for India. Energy security will become ever more important, even critical. The Middle East used to account for more than 60 percent of the nation's crude oil imports. Now, Russia accounts for 40 percent. Better diversification of supply sources will reduce vulnerability. But it also comes with a challenge. When you stretch the supply chains and are sourcing imports from further away, you might have to build up additional oil stocks to be able to meet your needs.

Looking forward, we don't see a real problem in terms of supply of crude at the global level. Currently ‘OPEC+’ is sitting on quite a significant spare capacity after production cuts and voluntary production cuts.

They could bring that oil quickly back to the market if there is a need. We're also seeing very strong growth in supply from the US, Brazil, Guyana and the Americas. In fact, this year, we're expecting global demand growth to slow down. Supply from those three countries alone will be enough to meet that demand growth. And this is the trend to 2030. We think enough supplies will be brought to the market to meet global demand, but you might see continued shifts in trade patterns from what you are used to.

With the strong growth in demand amidst global weakness, do you foresee a situation where India would have a better negotiation power when sourcing energy?

The new supplies that are coming into the market are freely available, and it would depend on pricing. As a buyer, you always have some negotiation power.

I think that as India's role and position in the global oil markets strengthen, there's no doubt that India's market share will increase. I think many of the key suppliers are looking to India as a source– as an important market.

As a big crude buyer, you can certainly do term deals at better terms and better prices.

What are the biggest challenges for India in meeting its blending targets?

I think it's the feedstock issue. If we're talking about sources in biofuels, there's a lot of competing demands for these feedstock. You don't want to go into the food crops, but we also need feedstock for coal-fired power generation. So, there's a lot of different targets for different segments. I know we did not meet the target this year because of a bad crop and dependence on weather. That will be the challenge.

We have two wars going on at the moment. Crude oil prices have been volatile due to the geopolitical tension but seem to have stabilised now. Has the market become more resilient?

There are a lot of factors at play. When we look at Russia, it was the biggest oil exporter and the possibility of it shutting down was a major concern. When the Russia-Ukraine war started, we were coming out of COVID, there was recovery and demand was very strong.

Today, oil demand growth is slowing down, compared to the past three years since COVID. And with all the supplies that are coming up from the US, Brazil, and Guyana, the markets seem to be taking it more in its stride. But it doesn't take much, it will not take much. We're looking very carefully. And we have talked about it before. Now, the OPEC plus is sitting on quite a significant volume of spare capacity, and they would like to bring it back to the market. So there's a potential for additional supplies here.

We're also looking very carefully at industry stocks, with stocks around the world and in the US and Europe and the key markets. And they remain low. So the buffer is not that large. If we were to have a major disruption, as we already see now, that oil is rerouting from the Red Sea around the Cape of Good Hope. The supply chains become longer, you might have to wait three weeks, five weeks, six weeks for your flows to shift. This is when the stocks, the inventories become very crucial to bridge the gap by the time you can reorganise. The markets always rebalance. But there's a lot of nervousness out in the market. But for now, it seems that supply and demand is roughly balanced. And we're able to source crude and products have slowed a bit. So it seems to be okay for the moment.

Do you think crude oil prices will stabilise at these levels?

It is at a better place. In 2024, we see supply growth outpacing demand growth. So the outlook for 2024 is a rather comfortable oil market where there wouldn't be much tension. And if there is going to be disruptions, we have spare capacity, and there are still a lot of inventories. In the absence of very significant disruptions or an increase in geopolitical tensions, and the situation in the Middle East in particular, we see the market looking rather comfortable.

Do you expect crude oil prices to soften more?

It's difficult to say. Now, we are still in the middle of winter; we were saved once again by a very mild winter in Europe. So again, we are now coming into the summer, the Northern Hemisphere summer season. Transport demand is increasing and see how refineries are doing. What we're seeing today looks reasonable. We expect we will stay at these levels for at least this year and maybe into the following years.

When we talk about biofuels and other alternative fuels, we cannot leave natural gas behind because that has been pegged as a transition fuel. Does India have the infrastructure to meet the ambitious targets it has set?

I know gas is a big priority. What we see is that, in many countries, the affordability issue is really crucial in the LNG market. What we saw over the past few years is that the prices for LNG went so high because of Russia, and Europe buying LNG.

It's our view that India should, if it can, get access to natural gas to replace coal, and build clean energies, renewable energies and all the other technologies. But it will be a question of price. I guess you have gas-fired power in India that is not being used today. So it's a question of securing those supplies at affordable prices, so that you can have affordable electricity and so forth for the people.