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India's LNG demand resurgence contingent on low prices, resisting COVID-19

Highlights

High LNG prices may not survive beyond December: Petronet LNG chief

Rush to restock inventories contributing to high prices: Petronet chief

India LNG demand could rebound to pre-COVID levels by early 2022

India's LNG demand could rebound to pre-COVID-19 levels by early 2022 as its economy recovers, provided spot LNG prices soften and the country is able to repel any subsequent waves of COVID-19 infections, according to officials from the oil and gas ministry, and gas company executives.

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The South Asian country has emerged as a key participant in the LNG market place and despite being price sensitive, it has set the floor for spot LNG prices by picking up cargoes every time prices begin to drop.

Due to their price sensitivity, the positioning of Indian importers in the spot market is a key indicator of the price direction, and recent tenders have often served the purpose of testing market levels when the price trajectory is uncertain.

Interestingly, while LNG prices are expected to remain high through this winter, importers like state-run Petronet LNG expect buying opportunities to emerge fairly quickly. The S&P Global Platts JKM price for spot LNG had breached $17/MMBtu in the week of Aug. 16, before easing to $16.552/MMBtu Aug. 19.

"The current LNG price levels may not survive beyond December, as sufficient inventories would have been built up by then in an expectation that spot LNG prices might breach last year's record levels," A.K. Singh, managing director at Petronet LNG, the biggest importer of the clean fuel in India, said after the company's quarterly results on Aug. 14.

He said current high spot prices were attributable to a buying spree in anticipation of a repeat of last winter's price surge, when prices hit a record level of over $30/MMBtu.

"The current level of natural gas prices are expected to come down after January when winter sets in," an oil ministry official said Aug. 19, echoing Singh's views.

Fighting the virus

India, the second-most populous country after China, was hit by a second wave of COVID-19 infections in April-May, when state-level lockdowns slowed gas demand and crippled parts of the economy.

In May and June, Indian LNG importers raised concerns about tank tops, and cargoes were being diverted to other regions. In July, LNG cargoes delivered to India were more than 20% fewer year-on-year, according to shipping data.

"LNG demand in the first quarter [April-June] was better compared with the year-ago quarter but less than the previous quarter [January-March]," Singh said. Year-on-year imports were higher due to the low base of 2020 when demand had collapsed due to COVID-19.

Abnormally high spot LNG prices along with COVID-19 impacted LNG imports in India during the April-June quarter, leading to weaker utilization for piped LNG as well, Nitin Tiwari, lead analyst, Yes Securities, said in a note Aug. 16.

Fighting off any future waves of the virus will be key to maintaining gas demand, which is showing signs of recovery.

Petronet LNG's flagship 17.5 million mt/year terminal at Dahej in western India recorded a run rate of 87% in the April-June quarter compared with 81% in the year-ago quarter, but it was lower than the 91% in the January-March quarter.

In July, the run rate rebounded to 90%-95% at Dahej, as economic activity started to improve following the second COVID-19 wave.

High prices are a spoiler

Petronet LNG said its term procurement in the April-June quarter fell by around two cargoes from its usual 10-12 term cargoes, and spot buying was also curbed by high prices.

"High LNG spot prices are a spoiler to domestic demand," V.K. Mishra, director finance, Petronet, said during an investor call Aug. 16, adding that current prices made long-term contracts the only viable option.

"The spot price has to come down to $6-$7/MMBtu for demand to trigger," another senior official with the oil and gas ministry said.

"A price of around $10/MMBtu appears to be a sustainable price for term contracts as user industries like power, fertilizer, and city gas distribution network are at ease with this level," Singh said.

He said many buyers either deferred or rescheduled spot LNG cargoes at high spot prices, indicating demand elasticity among Indian importers around the $10/MMBtu level, where LNG can be replaced by any petroleum fuel, be it furnace oil or naphtha, at a cheaper level.

Petronet LNG buys 7.5 million mt/year from Qatar's RasGas and 1.44 million mt/year from the Gorgon LNG project in Australia under term deals, and the remaining from the spot market.

Singh said India's demand for LNG is expected to grow at around 7% annually to reach 600 million cu m/day by 2030 from the current level of 150 million cu m/day, a fourfold increase over nine years.

India's LNG import terminal capacity stands at 42.5 million mt/year, according to the oil and gas ministry. India is targeting 70 million mt/year import capacity by 2030 and 100 million mt/year by 2040, and raising the share of natural gas in the overall energy basket to 15% by 2030, from the current level of 6.3%.