The double-whammy of both global oil and gas prices surging is threatening to dim the chances of a sustained energy demand recovery that India is expecting after a long period of slow growth, clouding the outlook for spot LNG and crude oil purchases.
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With various sectors of the economy already starting to feel the pain of high fuel prices, industry sources said Indian oil and gas importers were mainly sticking to their term contracts and only occasionally picking up spot cargoes, a trend that is likely to continue in the near term.
"High oil and gas prices bring bad news for GDP and inflation," said Dharmakirti Joshi, chief economist at CRISIL, a unit of S&P Global.
"From an inflation perspective, it has a direct as well as a more pronounced indirect and cascading impact, because oil and gas prices feed into key input costs of sectors such as transport, manufacturing and fertilizers. It makes the recovery process difficult," Joshi added.
With global oil prices surging to pre-pandemic levels, retail gasoline prices in the Indian capital recently soared to record highs of Indian Rupees 100/liter. But the international price of oil is not solely responsible for high domestic retail prices; domestic taxes also account for a large portion.
"India's oil demand is recovering as the COVID situation in the country has improved. Although high fuel prices could slow its recovery somewhat, we expect oil prices to ease in the coming months as summer driving demand starts to wane, and with the likely return of Iranian barrels and higher US supply to weigh on balances," said Lim Jit Yang, adviser for Asia-Pacific oil markets at S&P Global Platts Analytics.
Platts Analytics expects Dated Brent prices to average around $77/b this month before easing toward $66/b by the end of the year.
LNG in the same boat
A leading Indian LNG importer said that high prices across the board for all fuels had also left little room for fuel switching between oil and gas, adding that LNG regasification at some of the key terminals was currently down around 15% from the same time last year.
"The only good thing is that we have many term cargoes that are coming in as per schedule. That will take care of any incremental demand, but spot imports will remain subdued in the near term," the source added.
The Platts West India Marker, or WIM, was assessed at $13.029/MMBtu on July 9, compared with $11.450/MMBtu a month ago and $9.325/MMBtu two months earlier.
"A lot of Indian buyers have got used to the seasonality of demand and prices in colder regions and are now in shock as summer prices have reached levels which they are used to seeing in winter," another trader in India said.
Jeff Moore, manager for Asian LNG Analytics at Platts, said India had shown some unwillingness to take LNG at such high prices, mostly in the form of unawarded tenders, adding that LNG imports fell by 13% in June compared to year-ago levels to reach 87 million cu m/d.
"However, given the resurgence in economic activity as the country recovers from the recent wave of COVID-19 lockdowns, imports are still expected to pick up from June's level in the months ahead to average more than 90 million cu m/d in Q3," Moore said.
An Indian end-user said that with refinery operations in India returning to normal levels, as well as fertilizers and industrial demand coming back with full force, pent-up demand could encourage spot LNG buying activity in coming months.
"I think there will be more buying from India soon. Summer season is ending in India and peak demand is here. Buyers don't want to wait any longer for a price correction downwards," the end-user added.
But on the other hand, other market sources remained bearish about spot LNG demand returning to levels seen prior to the second wave of COVID-19 cases in the country.
"We do see improvement in downstream demand but spot prices are really high now, so we aren't interested for now. We might see demand for only 1-2 cargoes per month from India if this goes on," an Indian buyer noted, adding that spot LNG appetite would be on a hand-to-mouth basis if the double-digit spot price environment continued for long.
Petronet closed a buy tender on June 30 for four cargoes, but it did not subsequently award the tender due to very high offer prices, trade sources said. The state-run firm closed another tender on July 9 for delivery of one H2 July-delivery cargo into Dahej terminal. However, this tender was also heard to have not been awarded. The company was heard to have subsequently re-issued a tender for the same requirement.