Competitiveness May Adversely Impact Purpose of Gas in India's Energy Shift

ICIS warned in its previous quarterly outlook that spring delivery prices would bottom out higher than in the same period in 2021. However, reality has far exceeded our expectations. As of early April, Indian buyers were having difficulty obtaining spot cargoes for less than USD 30/MMBtu and there are still some bright clouds in the sky.

In late 2021, Japan, the world's second-largest LNG importer, will have built record storage volumes. However, the country only has surface LNG storage, and reserves are depleting faster. By early April, inventories had fallen below average, prompting utilities to return to the spot market to replenish supplies.

Earthquake-caused shutdowns and regulatory obstacles have also reduced the availability of coal and nuclear generation capacity, resulting in increased gas use in the coming months.

The market also reacts to Europe's shift away from Russian pipeline gas. Compared to last year, European buyers have shown a greater willingness to outbid their Asian counterparts.

According to ICIS data, combined imports into France, Belgium, and the Netherlands could surpass China for the first time in April. The EU has set a target of filling underground storage tanks to 80 percent capacity by November 1, with LNG currently seen as the only viable option for increasing supply.

China, the world's largest LNG importer, has begun to respond to price increases, and its industrial demand has slowed. Non-price factors such as mild weather and high storage volumes, on the other hand, have pushed LNG imports lower.

Increased rainfall in southern China may reduce gas-to-power demand compared to last spring, but COVID-19 lockdowns are expected to have a limited impact, and imports are expected to increase by the middle of the year. In the second half of 2022, the availability of new storage projects and regasification terminals backed by long-term supply contracts is expected to accelerate growth and intensify global competition for spare LNG.

This may also pose difficulties in Indian buyers snatching up available Russian LNG, as Chinese buyers would be motivated to absorb Russian spot volumes. As per the ICIS global supply balance, there is a small supply surplus in May and June and a deficit in the second half of the year. Further demand destruction will be required to address the shortfall, painting a bleak picture for price-sensitive consumers.

LNG consumption by refineries has been cut in half as consumers have switched to oil as captive fuel, while domestic gas consumption has increased slightly. This has had little effect on operations, with average refinery capacity utilisation higher than during the same period last year and at or above 100 percent capacity on average.

Gas demand from the power sector is down by one-third, but LNG use has been cut in half as domestic gas supply has become more stable. As a result, monthly gas-fired generation has been reduced by about 1TWh.

However, because natural gas accounts for less than 2 percent of the power generation mix, other sources - coal, nuclear, and renewables have been available to make up the difference. Annual power demand growth, which is currently around 3 percent, has also been covered. This summer, coal shortages are likely to pose a more significant threat to supply security than gas shortages.