Why India’s thirst for crude oil will only grow

A growing middle class, burgeoning transportation needs and industrial expansion could see India becoming the biggest oil demand growth engine in the second half of the current decade, S&P Global said in a report.

With freight and aviation sectors also showing strong consumption, India could be responsible for a quarter of global oil demand growth at least over the next 20 years, the report said.

In fact, India is set to end the current year with its oil demand growth rate surpassing China’s, making it one of the fastest-growing consumption centers, a trend expected to spill over into next year, the report said.

The scale of the demand will only prompt the South Asian nation’s refiners to accelerate their expansion plans.

Despite China’s lower demand growth, its market size–over three times larger than India’s–will continue to contribute largely to oil demand by volume terms, yet key oil market stakeholders are shifting their focus to India amid expectations of its peak demand scenario coming much later than China’s, S&P Global said.

“India will be the leading driver, along with Southeast Asia and other parts of South Asia, of the region’s future oil demand growth,” said Kang Wu, global head of macro and oil demand research at S&P Global Commodity Insights.

“In 2025, India is forecast to deliver a relatively faster growth in oil demand of 3.2%, compared with China’s 1.7%,” Wu added

In the first ten months of 2024, India’s oil demand rose to 180,000 barrels per day (b/d), 3.2% higher from the last year. While in the same period, Chinese oil demand rose by 0.9% to 148,000 b/d.

“Thanks to GDP growth of almost 5% year over year, India’s oil demand is likely to hit 6 million b/d in 2025 or a year later,” said Ehsan ul-Haq, an independent oil markets analyst.

“The rising middle class, transportation requirements and industrial expansion are expected to be the key drivers. Freight and aviation sectors are also showing strong consumption. India could become the largest oil demand growth engine in the second half of this decade and could be responsible for [25%] of global oil demand growth in the next 20 years,” ul-Haq added.

The International Energy Agency (IEA) forecasts that India will lead global oil demand growth, with consumption expected to rise from 5.4 million b/d in 2023 to 6.7 million b/d by 2030.

“Major Indian oil companies are responding to this demand by investing heavily in refining and petrochemical infrastructure,” said Rajat Kapoor, managing director for oil and gas at Synergy Consulting.
India is set to see significant refining capacity growth in 2025.

“The expansion comes as domestic consumption continues to rise, straining the current capacity of nearly 255 million mt/year. The country’s push to boost oil refining infrastructure ensures that the nation will remain a key engine of global oil demand,” Kapoor added.

Diversification of crude import basket

As India’s refining capacity is set to rise, refiners and policymakers are intensifying efforts to diversify the crude import basket to reduce overdependence on a few supplying countries or regions.

Prime Minister Narendra Modi’s maiden visit to Guyana last month opened opportunities for India to expand crude oil purchases. The South American country supplied a couple of trial crude cargoes to Indian refiners in 2021.

“The share of Middle Eastern crude shipments to India’s basket is likely to drop by a few percentage points due to the diversification [of import sources]. But, overall, the crude grades in India’s import basket are expected to remain medium grades and we don’t anticipate significant drop in share of sour crude in 2025,” Abhishek Ranjan, South Asia oil research lead at Commodity Insights.

Although Russian crude’s share in India’s import basket has been hovering around 40%, future flows remain uncertain as the market awaits decisions from US president-elect Donald Trump after he takes office in January, analysts said.

India, which imports as much as 85% of its needs, has pledged to continue buying oil from the cheapest available sources to meet growing demand, with Russian oil falling in that category due to attractive discounts.

In the first nine months of 2024, India’s Russian crude imports averaged 1.7 million b/d, making the non-OPEC producer its largest supplier. According to S&P Global Commodities at Sea data the US was the fifth-largest supplier, accounting for 215,000 b/d in the same period.