Winter Chill: Global LNG Prices Set to Stay High, Straining India
Jefferies warns that rising global LNG prices and shipping costs could strain India's domestic market and fuel OMCs as winter approaches.
As the winter season approaches, India is facing a potential affordability crisis in its energy sector. According to a recent report by Jefferies, global LNG prices are expected to remain elevated, putting significant pressure on the domestic market. The warning comes as spot LNG prices have already climbed 6 per cent week-on-week, averaging USD 32 per million British thermal units (mmBtu).
European Storage Woes Fueling Price Hikes
The primary driver behind the price surge is the tightening supply in Europe. The report highlights a concerning dip in European Union (EU) gas storage levels, which currently stand at 75 per cent. This is a notable decrease from the 83 per cent recorded during the same period last year. With lower reserves heading into the coldest months, the competition for available gas is intensifying, leaving markets like India vulnerable to price volatility.
“Domestic affordability is stretched at current prices,” the report noted, adding, “Hence, we expect gas prices to remain elevated as we head into winter.”
Crude Oil Volatility and Shipping Nightmares
While Middle Eastern oil exports (excluding Iran) have recovered to over 90 per cent of pre-war levels, the global crude market remains unstable. Renewed attacks in the region have pushed the physical crude premium up by 8 per cent week-on-week to USD 9 per barrel.
The logistics of moving oil have also become a nightmare. Importers are now opting for longer routes to move away from Middle Eastern dependencies, leading to an all-time high in crude oil-in-transit. This shift has caused freight rates to skyrocket; they are currently nearly eight times higher than they were at the start of the conflict. Freight costs now make up more than 25 per cent of the landed cost of crude oil, a staggering jump from the pre-war level of just 3 per cent.
The Financial Hit to Indian OMCs
For India, the combination of high crude prices and the vanishing "Russian discount" is creating a financial storm for Oil Marketing Companies (OMCs). The discount on Russian Urals has shrunk drastically to just USD 2 per barrel relative to Brent, compared to a massive USD 14 per barrel discount seen at the end of February.
With procurement costs aligning with the Indian crude basket price of USD 118 per barrel, OMCs are bleeding money. Jefferies reports steep marketing losses on fuel, with petrol and diesel losses estimated at Rs25 and Rs37 per litre, respectively, based on 15-day average pricing.
Impact on Refining and Petrochemicals
The instability extends beyond raw crude to refined products. Ukrainian attacks on Russian refining infrastructure have tightened the middle distillates market, meaning supply chain normalization could take a long time, potentially supporting elevated margins through FY27.
Interestingly, the chaos has provided a silver lining for some. Disruptions in Middle Eastern petrochemical facilities—including damage to two major plants in Saudi Arabia and Iran—have pushed up margins for petrochemicals. Average margins for polyethylene (PE), polypropylene (PP), and polyethylene terephthalate (PET) have surged 55 per cent since February-end, a trend that is aiding the profitability of Reliance's O2C (Oil-to-Chemicals) segment.