The steep rise of Covid-19 infections in India and the continuously worsening situation in the country has prompted Rystad Energy to significantly downgrade its short-term global liquids demand estimate. India’s struggle will slash an extra 575,000 barrels per day (bpd) of oil liquids demand in April and 915,000 bpd in May 2021, disturbing the almost-balanced global oil market and building a sizeable glut.

As India’s backstep coincides with OPEC+ bringing back much of its curtailed oil output, the demand loss from one of the world’s largest oil consumers will result in a global oil liquids supply surplus of 0.9 million bpd in April and 1.4 million bpd in May 2021.

Our revisions to India are supported by our real-time data, which show traffic in major cities like Mumbai, Bangalore, and New Delhi plummeting to nadirs experienced during the first wave of lockdowns in India a year ago. On top of night and weekend curfews, many states have imposed strict lockdowns overnight, shutting down non-essential businesses and limiting public transport. The federal government has so far, however, refrained from initiating a nationwide lockdown that was put in place last year, even as daily cases surged past 300,000, more than double the count during the previous wave’s peak.

Even so, in Mumbai, for example, traffic has come to a near standstill, with activity levels just 45% of normal pre-pandemic levels, compared to the drop down to 35% in April 2020. Overall, road traffic in India is at 87% of pre-pandemic levels. Rystad Energy’s mobility stringency index shows that Indians are just as restricted in their movement now as they were back in April 2020.

“We were expecting Indian liquids demand to total 4.84 million bpd in May 2021, but the Covid-19 case surge knocks this down to 3.93 million bpd. As infections continue to rise and its health system is overwhelmed, India’s oil demand could lose more ground going forward, making further downgrades possible, both on magnitude and duration,“ says Louise Dickson, senior oil markets analyst at Rystad Energy.

When the country first locked down in April 2020, products demand cratered to 3.13 million bpd, but has been on a steady recovery trend over the past year. The sudden and very strict lockdowns imposed in the past few days will result in a 13% demand drop in India in April compared to March 2021.

The optimism in the oil market is driven by the progressing broad-based recovery in demand for end-user products such as gasoline, diesel, and jet fuel, so the India setback will sting, especially if refineries are not able to reduce runs to an acceptable level to avoid inventory builds.

Refineries in India were churning nearly 5.5 million bpd before the pandemic, which cratered to 3.6 million bpd at the peak of the April 2020 pandemic surge. Since November 2020, throughput has been steadier at a monthly level of 5 million bpd.

The big question for India will be how its refineries react to the sudden domestic demand drop. India, which has been publicly critical of OPEC+ artificially raising crude prices, may decide to notch down refinery operations in response to this period of lower domestic demand. But since not all refined products are consumed domestically, and many are marketed abroad, some of the more complex and profitable refineries may stick to business as usual.

So far, refinery-level data show sustained input levels despite the end-user demand cliff. Higher regional demand for gasoline could help Indian refiners to keep the balance by prompting a flood of product exports. In addition, reports of India’s largest refiners deferring maintenance due to a shortage of workers could support Indian refiners to maintain current levels of crude intake. This will likely be negative for margins though, and lower margins will be required to force a reduction in runs in the near term in the event of an extended drop in refined products demand.

The demand loss in India comes at a time when many other oil producers globally were planning to increase output. OPEC+ alone is set to add 2 million bpd of supply by July 2021, not including any potential upside risk to Iranian supply. The most significant upward supply risk comes from Iran, for which we have increased our supply expectations given increased domestic demand and growing exports.

We now see Iranian crude and condensate production creeping up more quickly to year-end 2021 levels as exports have enabled higher production recently, but we keep our base case assumption of a full return to the market/sanctions lifting around the second quarter of 2022, enabling the rise to full utilization of its oil production capacity of 4.2 million bpd by the first quarter of 2023.

“The tragic crisis in India is a reminder that the road to recovery is anything but predictable or smooth, and that oil demand is still very much at risk in the near term. Overall, global macro fundamentals are hinting that economic recovery is already underway, but Covid-19 breakouts will continue to thwart progress and be a persistent threat, prompting OPEC+ to remain vigilant,“ Dickson concludes.