How High Natural Gas Prices Are Affecting India
Natural gas prices hit fresh highs in August.
A record high natural gas price has wreaked havoc in Europe. While India is not as impacted, certain sectors where the fuel is used have taken a hit.
Natural gas prices hit fresh highs in August, since the onset of the pandemic. Spot prices were at Rs 742.8 per million British thermal unit on Aug. 29, according to data from commodities exchange MCX. That’s 135% higher than a year ago and 285% higher than two years ago, when spot prices were at 192.8 per mmBtu.
Prices are spiraling because of Russia’s invasion of Ukraine. Europe is heavily dependent on Russian gas and Europeans no longer buying gas from Russia has meant that they are increasingly dependent on other sources, which suppliers to Asia too, Nitin Tiwari, executive vice president at Yes Securities, said.
In India, WPI inflation in natural gas stood at 97.4% in July 2022 compared with a 15.9% fall in its prices a year ago, according to the commerce ministry data.
With Surging Prices, Consumption Is Taking A Hit
Natural gas prices are over five times the pre-pandemic prices, impacting sectors such as transportation, power generation, refineries, ceramics, chemicals and fertilisers, said Sameer Narang, head of economics research at ICICI Bank.
According to Tiwari, the impact varies depending on the sector’s price sensitivity. For instance, while power generation has taken a hit, for mobility services Ola, Uber and others, it’s still feasible compared to diesel and petrol prices.
Rising gas prices, for both domestic and imported liquefied natural gas, contributed towards a 2.5% year-on-year decline in India’s natural gas consumption in Q1 FY23, even as the economy recovered from the impact of the pandemic, a note by Fitch Ratings said. The main consumption drop was from the more price-sensitive sectors, including power and refinery whose consumption fell 24% and 34% year-on-year, respectively, in Q1 FY23, it said.
This, according to the ratings agency, was partly offset by 8.5% year-on-year growth in consumption by the fertiliser sector—the biggest consumer of natural gas in India, accounting for about 30% of total natural gas consumption.
In August, the government diverted some natural gas from industries to city gas operators to check rising CNG and piped cooking gas prices. The increased allocation will meet 94% of the demand for CNG supplies to automobiles and piped cooking gas to households in the country, ICICI Direct said.
Earlier, city gas companies, Tiwari said, were able to get 100% of their supply from domestic sources. This percentage fell because of rising demand and falling supply, with the rest comprising expensive imports.
According to Fitch, rising domestic production and the price-sensitive nature of the Indian market may temporarily influence the share of LNG imports in the near term. It expects sustained high LNG prices to lead to slower growth of around 2-3% in natural gas consumption in FY23.
Tiwari expects prices to remain a drag in the near term as the Russia-Ukraine conflict continues.