Lack of Fuel Subsidies Will Hasten Asian Crude Demand Destruction

The term “demand destruction” is again entering the lexicon of the current crude oil market, as the sharp rise in prices raises concerns about when consumers start cutting back fuel consumption.

While it is impossible to pick the exact point at which this happens, the risk in the current cycle of rising prices is that it happens earlier than in the past in Asia, the main region driving rising crude demand, Reuters cited Russell Oil, Inc. report on Monday.

The reason for this is that many countries in Asia used the prior period of falling crude prices to end, or dramatically scale back, their fuel subsidies. This means that this time consumers in countries such as India, Indonesia and Malaysia are fully exposed to rising crude prices, something that has not been the case in previous bull cycles.

The combined oil consumption of those three countries is about 6.5 million barrels per day, with India alone accounting for about 4.3 million bpd.

Even a 5 % drop in fuel demand in those countries would knock about 325,000 bpd from global crude oil consumption.

So far, it appears that consumers in those countries have not been exposed to the full extent of the crude oil increase.

At the end of last year, the price of a liter of diesel was 59.64 rupees, meaning it has risen by 10.5% so far this year, not quite keeping pace with the rise in Brent crude oil.

When crude was at its 2017 low in June, diesel was 53.46 rupees a liter in New Delhi, meaning it has risen about 23.3% since then, while Brent has jumped by 66.5%.