India's diesel demand to drop in first quarter

SINGAPORE (Reuters) - Diesel demand in India might drop in the first quarter as a government decision to abolish high-value currency bills is expected to hurt small businesses, analysts said.

Diesel demand is expected to grow only 2 percent in the first quarter of 2017 compared with a year ago, less than half of the 5-percent growth rate seen in the first 10 months of 2016, said Tushar Tarun Bansal, director of Singapore-based consultancy Ivy Global.

In November, India Prime Minister Narendra Modi scrapped 500- and 1,000-rupee notes as part of a crackdown on tax dodgers and counterfeiters. Nearly 90 percent of transactions used to be in cash in India, which was gripped by a severe shortage of currency after this sudden decision.

"The cash crunch is affecting sales of two- and three-wheelers, and liquidity has not been enough to sustain small businesses, which are struggling to survive," said a fuel trader from India.

Demand for oil product may be lower than projected as consumers have been stocking up fuel as an avenue to spend the 500 rupee and 1,000 rupee notes as exceptions were given to purchase diesel and gasoline at pump stations temporarily, a source with an Indian refiner said.

"But I think this (dip in demand) will be temporary as bigger businesses are not affected and people will return to buying cars (later in 2017)," the refiner source added.

Asian refiners' profit margins from producing diesel in 2017 may rise for the first time in four years as demand for the fuel improves in the infrastructure, construction, mining and oil and gas exploration sectors.

A return to normal winter conditions after last year's warmer-than-average temperatures along with a recovery in crude oil prices that will stabilise the finances in some producer countries will also spur higher margins, analysts and traders said.

China's "Belt and Road Initiative" will boost infrastructure investments and diesel demand in Myanmar, Bangladesh and Pakistan, said analysts from consultants Energy Aspects in a note to clients.

This year's spring refinery maintenance in Asia is expected to be the heaviest since 2014, with 1 million bpd more capacity shut in March and April in 2017 than during the same time last year, which will significantly pull down diesel stocks, they added.

The Tokyo Commodity Exchange (TOCOM) on Wednesday launched a physical market for oil products including gasoline and kerosene, the first such contracts by a Japanese exchange.

The listed contracts will be gasoline, kerosene, gasoil, bunker A and low sulphur bunker A (LSA) for delivery by maritime shipment or at a refinery.

(Reporting by Jessica Jaganathan; Editing by Sherry Jacob-Phillips)