One of the first signs that rallying commodity prices have started to chip away at demand at major energy importers is emerging in India—the world’s second-biggest coal importer, third-largest crude oil importer, and a major LNG buyer.
India is one of the most price-sensitive large importers of energy commodities, including oil. Last year, India repeatedly called on OPEC and OPEC+ to increase production more than planned to bring international oil prices down, saying that it does not support “artificial cuts to keep the price going up.”
India has also urged the OPEC+ group to consider the effects of higher oil prices on consumption in economies recovering from the pandemic.
India’s economy is susceptible to rising commodity prices, considering that crude oil imports meet 85 percent of its petroleum demand, while coal is the major fuel for power plants, accounting for 70 percent of total electricity generation in the country.
Although India is more sensitive to high energy commodity prices than other major importers, its current predicament with high prices burdening the import bill and straining budget resources could be the beginning of demand destruction globally at oil prices at $90 a barrel—with a potential for $100—coal prices close to record highs, and LNG spot prices in recent months at much higher levels than in the prior two years.
Indian oil demand and imports have been holding strong in the past few months and are estimated to have hit a record in January, per Refinitiv Oil Research, which pegged India’s crude imports at a record for the month 5.04 million bpd.
However, crude arriving in January was likely contracted in November when Brent was trading at around $10 a barrel lower than now and even dipped below $70 per barrel at the end of November, Reuters columnist Clyde Russell notes.
With oil at $90 or nearly $90 a barrel these days, Indian purchases could slow down going forward.
In liquefied natural gas (LNG), two major factors have been at play in recent months—growing domestic natural gas production in India, and high and volatile LNG spot prices internationally.
India tends to be more exposed to spot LNG prices than other major gas importers in Asia because it relies more on opportunistic buying when prices are low. But Asia’s spot LNG prices haven’t been anywhere near “low” in recent months, although they are off the record highs seen in the autumn of 2021.
India’s LNG imports in December 2021 were down by 7.5 percent from December 2020, government data showed in January. At the same time, Indian domestic gas production rose by 19.5 percent in December 2021 compared to December 2020.
“India’s natural gas production increased by 22% yoy in April-December 2021 and the momentum is likely to continue over the next 12-18 months, driven by expanded production at new fields, before stabilizing in FY23,” Fitch Ratings said in a report last month.
“We believe rising domestic production and higher liquefied natural gas (LNG) spot prices are likely to weigh on LNG imports through to 1HFY23. However, LNG imports should rise steadily over the medium-term as consumption picks up pace,” Fitch added.
In the coal sector, India’s imports in January 2022 are estimated by commodity intelligence firm Kpler to be lower than in November and December, Reuters’ Russell notes. The lower coal imports reflect lower availability from top exporter Indonesia and record-high coal benchmark prices.
Overall, high energy commodity prices are bad news for India’s economy and finances as industries could slow down. At the same time, government finances are burdened with soaring energy import bills on the one hand and higher expenses for cutting fuel taxes to ease inflationary pressures on the other.
After a cut in the autumn ahead of the Diwali festivities in November, India now may have to reduce taxes on fuels further at $90 oil and higher, Santanu Sengupta, senior India economist at Goldman Sachs, told Bloomberg Television last week.
India is the early sign that rallying commodity prices have started to affect demand. Globally, if oil demand continues to rebound and no fresh lockdowns are imposed, oil prices—and by extension, gasoline prices—will hold at elevated levels until they bring demand destruction, a slowdown in economic growth, or faster-than-planned interest rate hikes.
By Tsvetana Paraskova for Oilprice.com
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