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The recent dramatic fall in European gas prices (see chart 1 & 2) and the adjacent softness seen in Asian spot LNG prices (Chart 1) have been driven by i) milderthan-normal weather in Europe at the start of winter, ii) material inventory build outs by most nations ahead of their own stated deadlines, iii) limited LNG storage and import capacity in Europe and iv) limited traction in Chinese gas demand due to a resurgence of covid-related lockdowns and muted economic growth. Resultant of this, European gas prices recently fell to

* Multiple factors can squeeze supply: Chinese demand is expected to rebound from the lows of 2022, back to CY21 levels which can capture ~16mt of 20mt of capacity addition in CY23E. China has contracted a large part of this new capacity, hence, the ability of Europe to leverage this new capacity is limited. Even with winter demand for Nov 22-Mar 23 @10-11% below 5-year average levels, an additional 69bcm of storage rebuild volume would be needed in late 2022 for CY23 winter season to take European gas inventory back to ~95% of its capacity.

* Russian gas supplies will continue to fall: Russian gas supplies of ~60bcm/y in CY22 (164mmscmd) are likely to fall to 25bcm/y in CY23E (68mmscmd) and is likely that it can stop altogether. Non-Russian pipeline exports to Europe increased by ~10-11bcm in CY22 but capacity to increase this is limited to 1-2bcm for CY23E. Also, winter demand for CY22 so far has been milder than usual, any change in the severity of winter can deplete the inventory faster, creating even higher demand requirement for CY23 winter season.

* Short-term softness notwithstanding, FY24 can again see tightness: While short-term metrics have been favourable for LNG prices in Asia and elsewhere, gas costs for consumers across fertiliser, power and CGDs will remain constrained over FY24E, impacting margins. We believe domestic gas costs will still be managed at US$7-8/mmbtu for FY24E, thanks to the revision expected via the Kirit Parikh Committee. However, term LNG prices will trend at US12.0-12.6/mmbtu (depending on crude range of US$90-95/bbl) and spot LNG prices can trend at US$38/mmbtu for FY24E as well, keeping average gas costs for India at US$17.5-17.7/mmbtu levels.

* VIEW: Upstream sees limited impact, CGDs can see respite from lower domestic costs despite higher LNG: We have factored US$7.5-8/mmbtu for ONGC/OIL for FY24E which is not under threat from the Kirit Parikh Committee recommendations. For CGDs, while the expected rise in spot LNG prices over FY24E is a threat, the imminent reduction of domestic gas costs by ~US$2/mmbtu (as per reports) is a bigger positive. For GGL, however, continued risk of lower propane prices and strong LNG prices is an unfavourable combination and does create downside risks to our FY24E EPS estimates.

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