Saturday, December 4, 2021

Impact Of Coronavirus On The Petroleum Industry And World Economics

The global financial markets are struggling to battle the effects of Coronavirus or COVID-19. The energy sector is maintaining a close watch on its developments. Oil and gas producers through various industry bodies and associations have earnestly requested the Government to cut and defer taxes on output and end all price controls on domestic natural gas to help companies deal with the twin shock of a global supply glut and fall in demand due to the COVID-19 pandemic.

As the global crisis unfolds, India’s oil demand as a consumer has collapsed by as much as 70% as India endures its largest national lockdown. The estimate for the current demand loss is a stark reminder of the challenge facing oil producers as they haggle over a deal to cut supply and prop up the global energy industry. The energy companies are left with no other option but to seek refuge under provisions of their respective contracts in the aftermath of this crisis; thereby leading to a nation-wide chain reaction encompassing small factories, city gas distributors, gas marketers, domestic and overseas suppliers.

In the wake of these developments, the jet fuel demand in India has also been facing heat since the country’s jet fuel consumption in March fell by 29.86% month on month to 484,000 mt, being the lowest in over five years, amid demand destruction due to the nationwide lockdown. The ongoing lockdown in India has resulted in the stoppage of flights in the country, which has led to a supply glut, while demand for air travel has dwindled to a drip. This has resulted in sellers offering jet fuel at a steep discount to lure buying interest.

The leading Public Oil Marketing Company (OMC), Indian Oil has also stated that the demand for petroleum products, like petrol, diesel, fuel oil, bitumen etc. have reduced substantially. Several leaders have also warned that the airline and fuel business might be severely hit due to flight constraints. “Restrictions on movement coupled with travel advisories, have led to a 10 percent drop in sales of aviation turbine fuel, bunker fuel sales are also down approximately 10 percent”. Diesel consumption declined 1.13% compared to previous financial year, and petroleum consumption which was growing for 30 straight months upto February fell to 16.36% in March 2020. One of the largest crude oil markets, i.e the United States of America, has also suffered a price cut due to the Coronavirus outbreak in China, and is facing slumps in sales and stocks.

The increase in the demand of LPG is observed due to panic buying of cylinders. However, Indian government has ensured free delivery mechanisms to the poor under ‘Ujjwala’ scheme due for the next three months.

“To meet the rising demand for LPG, Indian Oil is taking steps to increase LPG production at its major refineries by optimizing operations, improving yield in LPG producing units, the company has said in a statement. Hence, the oil and gas sector is struggling to balance the supply and demand needs of consumers.

The International Energy Agency ( IEA) now sees global oil demand at 99.9 million barrels a day in 2020, a decline of around 90,000 barrels a day from 2019. This is a sharp downgrade from the IEA’s forecast in February, which predicted global oil demand would grow by 825,000 barrels a day in 2020. In the wake of such looming danger, the oil and gas industry of India should be strengthened indigenously. India has decided to further strengthen its strategic reserves through underground storage, which would be available during emergencies and situations of oil disruptions. Due to spiraling prices, India may be able to benefit from this opportunity if it is utilized well. “Cheaper crude will help current account deficit, rupee and inflation. A consumer spending on cheaper fuel will leave more money in hand. Fuel subsidies are expected to decline, thereby reducing government expenditure. The Government can aim to raise duties to boost revenue. LNG terminal operators can store cheap gas now and sell later. Marketers can look for more customers as gas becomes cheaper”.

Meanwhile, the country has taken stringent measures by restricting the movements of oil and gas cargoes on coasts, but has allowed cargoes, falling under the category of essential commodities, after clearance of COVID-19 quarantine protocol by the port authorities. In the near future, there could be decline in purchase of petrol, diesel and jet fuel. This might dampen the annual consumption figures of 2020-21 as well.

Script: Dr. Jeetendra Cheema, Analyst on Petroleum Industry.

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