New Delhi/Singapore: Diesel use in India temporarily spiked during two days of massive power cuts which left hundreds of millions of people without grid power, highlighting increasing clamour for the fuel to back up a rickety national grid.
Hot weather across the country and a shortfall in annual monsoon rains had already pushed demand as the grid struggles to meet peak consumption. The government has had to halve prices for farmers needing pumped water - ruling out any subsidy cut.
Diesel usually makes up about 40 per cent of fuel consumption in Asia's third-largest oil importer, although much of the demand is covered from domestic production and imports in the last year have been about 60,000-70,000 tonnes a month.
"Demand is higher and it significantly went up in the northern region in the last two days," said an official at state-run refiner Indian Oil Corp (IOC.NS).
Hundreds of millions of people across India were left without power on Tuesday, trapping miners, stranding train travellers and plunging hospitals into darkness when grids collapsed for the second time in two days.
"Diesel demand is very high, about 25 per cent growth in some states, mainly due to power shortages. The blackout is a one-off case, but otherwise demand is high due to power shortages. It should ease out in the next one or two months," Bharat Petroleum Corp Chairman RK Singh said.
Last year, around 15 per cent of total diesel demand of about 1.4 million barrels per day (bpd) in India was consumed for power generation, said Victor Shum at consultant Purvin & Gertz.
"I expect increased use of diesel-fuel power generators in the near term when the government tries to find solutions to the power grid failure. Diesel consumption should therefore increase, further boosting diesel crack spreads in the region."
The New Delhi government has forecast diesel consumption should grow 5.9 per cent in the current fiscal year, about the same pace as gasoline and slightly below the economy as a whole, which should expand by about 6.5 per cent.
Power and water
In June, when temperatures in New Delhi soared past 40 degrees Celsius, diesel sales were up 14 per cent from a year ago to 6.08 million tonnes and down only slightly from May as the monsoon failed to bring its usual respite from irrigation shortages and heat.
The government caps the price of diesel in an attempt to protect the poor and control inflation while petrol is sold at market rates. Diesel is 40 per cent cheaper than gasoline.
"Diesel being the cheapest commodity it is always a preferred fuel," Singh said.
Petrol sales in June were only 1.34 million tonnes.
The near drought conditions and power cuts mean New Delhi is unlikely to be able to cut its massive subsidy on diesel prices, analysts said, leaving markets disappointed again over its ability to rein in budgets.
"The government would be committing political suicide if it chose to raise diesel prices during this trying period," said Shum.
Traders said that despite the massive blackouts, they did not expect huge import demand for diesel as inventory is still adequate in the country and prices are high.
"Maybe if the blackout lasted 15-20 days then there might be imports into the country, but I think it is only a temporary problem as a lot of the power has been restored," said an India-based trader.
Rains had also revived by Wednesday, bringing down temperatures and watering parched farmlands.
"The weather is cooler now with temperatures having gone down, I don't think there has been a spike in air-conditioner use," said a source with an Indian refiner.
"At this point, I think Indian refiners will only import if there is any maintenance or outage that affects the supply-demand balance," said a second Indian trader.
However a source at IOC said his firm would buy diesel from private refiners in the country instead of importing at a higher price.
Singapore cash prices for the 500 ppm sulphur diesel and 10 ppm sulphur diesel, diesel grades imported by India, were at $122.17 and $123.02 a barrel respectively on Wednesday, Reuters data showed.
Premiums for both grades climbed to more than one-year highs in July on refinery outages and maintenance in Singapore and Japan which have curtailed supply in Asia.
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