– By HDFC Asset Management Company Limited (HDFC AMC)

Recently oil has been on the news, with global demand for the commodity expected to peak by 2029, and subsequently contract (as reported by International Energy Agency). Additionally, with rising supplies, led by non- OPEC+ (Organization of the Petroleum Exporting Countries) producers, expected to surpass forecast demand from 2025 onwards, it could potentially weigh on prices through the end of the decade. Further, the use of clean and energy- saving technologies is accelerating the decrease in pace of growth in oil demand. India has traditionally been a net importer of crude oil with the value of its oil imports registering ~3x growth between FY2021 and FY2024. From India’s perspective, any downward movement in prices of crude oil could act as a positive as it would ease the nation’s import bill, and positively impact our current account and fiscal position in the long run.

As per Petroleum Planning and Analysis Cell (PPAC), India imported 233 million tonnes (MT) of crude oil in FY2024 – the highest quantity ever. The demand for petroleum products is expected to increase in FY2025. In fact, import of crude oil for April 2024 stands at 21.4MT – 7% higher than 20MT imported in April 2023, pushing import dependency to 88.4% versus the already record high of 87.8% in FY2024.

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A major factor driving the rise in imports is the import of Oil at a discount from Russia. Post the Russia-Ukraine conflict, Russia emerged as one of the top contributors to India’s oil import, with its share in total imports having risen remarkably on the back of the discounts on oil prices. While the demand for Russia’s crude oil has remained intact, the following observation has been made: As per CMIE and Bloomberg, the average discount offered by Russia on its crude oil versus Brent Crude Oil has reduced by 20% in FY2024 – from $7.13 per bbl to $5.69 per bbl. As of CY2024YTD, the average discount stands at $3.93 per bbl. With the Government focussing on reducing its import bill, it would be interesting to see how it will proceed hereon.

Another major factor has been the increase in demand for Crude Oil and Petroleum Products. Two-thirds of India’s domestic petroleum is consumed for driving vehicles and cooking – Diesel (38%), Gasoline (16%) and Liquefied Petroleum Gas (13%) for FY2024 [PPAC]. With India becoming one of the most important drivers of global petroleum consumption, demand is expected to increase. Thus, the forecasted downward movement in prices of crude oil could be a boon in disguise. Furthermore, to address this demand-supply mismatch, the Government has been focussing on navigating the demand for fuel by building capacities and infrastructure for alternate sources.

The registrations of Electric Vehicles (EV) have seen ~12x rise between FY2021 and FY2024. However, the share of EVs is yet to witness a notable rise. The potential has been constrained majorly by high charging time and limited charging infrastructure. In the Interim Budget 2024-25, the Government emphasized on its focus to expand and strengthen the EV ecosystem by supporting manufacturing and charging infrastructure. Keeping that in mind, the wallet share of the automotive industry could rise substantially, as fuel is replaced by batteries, especially considering the favourable demand-side factors such as rising incomes, higher urbanisation rates, demographic dividend, and themes such as premiumisation and higher mobility needs.

Green Hydrogen is emerging as a popular choice for achieving energy independence at a global level by enabling greener operations in industries such as iron ore and steel, fertilizers, refining, methanol, and maritime shipping. With Green Hydrogen estimated to substitute fossil fuel imports of Rs1 lakh crore by 2030, the Prime Minister signalled the launch of the National Green Hydrogen Mission (NGHM) in 2021 “to make India self-reliant in the field of energy and become a Global Hub for Green Hydrogen Production and Export”. Since the Cabinet’s approval of an outlay of Rs 19,744 crore, Ministry of New and Renewable Energy has awarded tenders for setting up of 4.12 lakh tonnes of Green Hydrogen production capacity and 1,500 Mega Watts of electrolyser manufacturing capacity as of May 2024.

(The article is authored by HDFC Asset Management Company Limited.)

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