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Oil demand outlook murkier by emerging markets currencies distress

Daniel Acker/Bloomberg

Emerging-market currencies have slumped, making oil pricier. Stark choice between passing on pain or subsidizing consumers.

By Irene Garcia Perez, Prejula Prem, and Alex Longley

Petroleumworld 07 24 2018

Being an emerging-market economy can be tough when oil prices surge and your currency crumbles.

While Brent crude, the global benchmark, has advanced 11 percent this year in dollar terms, it's gone up by multiples of that in Russian rubles, Brazilian reais and Turkish lira, to name just a few. That leaves those governments with a tricky choice: subsidize the purchase of increasingly expensive fuel, or allow consumption to be eroded and accept the accompanying economic and political risk.

So far, several of the larger emerging-market countries that previously had subsidies appear to be returning to them, albeit less aggressively than they did when crude soared to a record a decade ago. While such interventions may place a strain on their budgets, they also mean the threat to oil demand should be cushioned for now.

“It will be very interesting to see how governments react in emerging markets,” said Michael Tran, a commodities strategist at RBC Capital Markets LLC. “Over the course of this year, we've seen several countries put subsidies back on. The currency component is a huge part of it.”

As the Organization of Petroleum Exporting Countries and its allies succumb to pleas from major consumers from the U.S. to India to help ease the impact, here's a run through ten large emerging market oil consumers, how they're responding to higher fuel prices, and what might happen next. Consumption data and growth estimates, both for 2018, are from the International Energy Agency. Currency moves this decade and economic expansion forecasts for this year are compiled by Bloomberg. The 2018 growth rate for India is from the International Monetary Fund.


  • Consumption in 2018: 3.63 million barrels a day
  • 2018 demand growth: 80,000 b/d
  • Currency this decade: -52 percent
  • GDP forecast for 2018: 1.8 percent

Prices have risen, albeit not too dramatically, in domestic currency terms and have now been frozen. That freeze is expected to stop at the end of the year, just as a tweak to export duties should also encourage Russia's refineries to send more product overseas. While that could in theory be negative for demand, in practice the government is unlikely to allow consumers to take a big hit. “You can expect the government will step in and do whatever it takes to keep the prices down,” said Kostantsa Rangelova, energy analyst at JBC Energy.


  • Consumption: 3.07 million
  • Demand growth: -20,000
  • Currency: -54 percent
  • GDP: 1.8 percent

“Increased government intervention in the diesel market will support domestic fuels demand this year,” said Mara Roberts, senior oil and gas analyst at BMI Research. “However, a weaker economic recovery will offset these benefits, resulting in a more modest uptick for the year.” It's also important to note that Brazil's car fleet can switch to using more ethanol, something that can also erode the country's demand for refined fuels when prices rally, according to Warren Patterson, a commodities strategist at ING.


  • Consumption: 1.97 million
  • Demand growth: -10,000
  • Currency: -31 percent
  • GDP: 2.3 percent

New president Andres Manuel Lopez Obrador promised to freeze fuel prices, something that would place a burden on government finances, according to Roberts at BMI. “In the short term, we expect the government will increase its focus on maximizing utilization rates at existing refineries, which remain constrained.” Those things could help buoy consumption, which has been in decline for several years, at least in the short term, according to Roberts.


  • Consumption: 1.02 million
  • Demand growth: 27,000
  • Currency: -69 percent
  • GDP: 4.2 percent

In May this year, before a general election, the government decreed a reduction of a special consumption tax on fuel products to minimize the effect of fluctuations in crude oil prices and exchange rates on the end consumers, said Toygun Onaran, managing director at Oyak Securities in Istanbul. “Even if crude oil prices rise, the pump prices don't change and the increase doesn't affect the demand,” he said.


  • Consumption: 779,000
  • Demand growth: -75,000
  • Currency: -69 percent
  • GDP: 4.8 percent

Egypt has cut energy subsidies several times since 2014, and in June further reductions were announced. “In the short term, the decision to slash subsidies will be bearish for fuels demand, with lower-income, marginal fuel consumers priced out; particularly with higher inflation ensuring consumers prioritize essential goods,” said Richard Taylor, an oil and gas analyst at BMI.


  • Consumption: 12.87 million
  • Demand growth: 470,000
  • Currency: 0.8 percent
  • GDP: 6.5 percent

In recent years, the Chinese government's oil-market interventions primarily revolved around avoiding price volatility, rather than trying to shield consumers from high prices. China's currency largely tracks the dollar and economic growth remains well above that of other large economies. Against that, a trade war with the U.S. could hurt the economy and the IEA's 2018 demand growth forecast is about a fifth lower than it estimates the country had in 2017.


  • Consumption: 4.97 million
  • Demand growth: 280,000
  • Currency: -32 percent
  • GDP: 7.3 percent

After deregulating gasoline prices in 2010, and diesel four years later, the Indian government made the most of the plunge in crude prices by adding more excise duty on oil. But with federal elections next year, it's now under pressure to respond to record high pump prices. It could slash fuel taxes or reinstate price controls. “In the past, India's oil demand has readjusted itself in response to an increase or decrease in oil prices within two to four quarters. As oil prices have increased in the last six to seven months, India's oil demand growth may weaken in the coming months,” said Abhishek Deshpande, head of oil market research at JPMorgan.


  • Consumption: 1.63 million
  • Demand growth: 33,000
  • Currency: -35 percent
  • GDP: 5.3 percent

Gasoline subsidies were abolished in January 2015, and the diesel subsidy was capped. In 2017, the government launched a one-price policy to provide fuel access to remote and underdeveloped areas at a similar price to those in more developed regions. However, the government is seen as adopting a structural price management strategy to cap inflation ahead of the elections next year. That would maintain purchasing power and prop up demand.


  • Consumption: 749,000
  • Demand growth: 22,000
  • Currency: -16 percent
  • GDP: 5.5 percent

In December 2014, the government abolished subsidies on the prices of diesel and gasoline and put a system in place where prices would adjust according to the market rate, as long as crude stayed below $80 a barrel. However, after a surprise leadership change in the 2018 elections, the pro-subsidy government has re-introduced fuel subsidies, reversing a trend of fuel price reforms.


  • Consumption: 1.44 million
  • Demand growth: 19,000
  • Currency: 0.1 percent
  • GDP: 4.2 percent

Since December 2010, the government capped diesel prices at around 30 Baht($0.90) a liter to alleviate the impact of the rising prices. Though the government subsidy spend is declining, the state has allotted about 30 billion Baht to absorb 50 percent of any increase in retail prices this year.


Story by Irene Garcia Perez, Prejula Prem, and Alex Longley from Bloomberg. 07 23 2018

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