Team SKM,
India has finalized its first structured agreement to import LPG from the United States, marking a significant change in the country’s sourcing strategy for a fuel used by more than half of Indian households. Starting 2026, public sector oil marketing companies – Indian Oil, Bharat Petroleum and Hindustan Petroleum – will collectively purchase around 2.2 million tonnes per year from US suppliers. This volume accounts for nearly one-tenth of India’s annual LPG imports.
The decision comes at a time when India’s dependence on the Middle East for LPG has been near-total for decades. This new arrangement introduces both strategic and economic implications for pricing, supply security and long-term energy planning.
Why the Middle East Dominates India’s LPG Supply
India’s domestic consumption requires a butane-heavier LPG blend because butane vaporises at higher temperatures and provides a stable flame suited to Indian conditions.
Most Middle Eastern LPG originates in oil refineries, where the natural output is richer in butane.
The US, however, produces most of its LPG through natural gas processing, which yields a propane-dominated product.
Product composition, combined with geographical proximity and lower freight costs, has historically made the Middle East the obvious supplier.
What Has Changed Now
Several recent developments have altered the global pricing landscape:
Shift in US export availability
A slowdown in Chinese purchases – historically the largest buyer of US LPG – created excess supply in the US market. This eased prices and opened export opportunities that were previously uneconomical for destinations as far as India.
Higher freight and risk premiums in the Middle East
Geopolitical tensions around the Strait of Hormuz have pushed up shipping insurance and freight costs. Since a large share of the world’s LPG moves through this route, disruptions or perceived risks directly raise import costs for India.
Temporary convergence of landed cost
The combination of softer US prices and higher Middle Eastern logistics costs narrowed the gap between the two sources. For the first time, US LPG became cost-competitive after accounting for long-distance freight.
These conditions encouraged India to trial US shipments in recent months and subsequently formalise a structured contract.
Strategic Advantages of Diversifying Supply
Reduced geopolitical exposure
A supply portfolio concentrated almost entirely in one region leaves India vulnerable to disruptions. Securing even 10 percent from a different geography creates resilience during periods of instability around Hormuz.
Two global pricing references
India’s LPG imports have long been priced against the Saudi Aramco Contract Price, the benchmark for Middle Eastern supply.
US cargoes follow the Mont Belvieu benchmark.
With two benchmarks in play, OMCs gain flexibility in procurement and improved leverage in price negotiations.
Competitive behavior from suppliers
Middle Eastern exporters – aware of India’s shift – have already started adjusting prices to remain competitive.
Broader trade considerations
Increasing energy imports from the US also helps offset recent tariff-related friction in bilateral trade by narrowing the merchandise trade imbalance.
Operational and Economic Limitations
Propane-heavy US cargoes
US LPG will need blending or operational adjustments to match India’s preferred cooking-grade composition.
Higher baseline freight costs
In the long run, ocean transport from the US will remain structurally costlier than from the Gulf. The recent price window is driven by temporary supply-demand distortions.
No direct impact on household LPG prices
Consumer cylinder prices are administered.
OMCs often sell below cost, creating under-recoveries.
In FY25, under-recoveries totalled more than ₹41,000 crore, despite a modest price adjustment.
Lower import costs will help reduce these losses but will not automatically translate into lower cylinder prices.
Implications for Public Finances
A reduction in under-recoveries directly lowers the compensation burden on the central government. If competing benchmarks continue to keep import costs contained, future fiscal outlays for LPG support programmes – especially under PMUY – could decline. This provides modest revenue-side relief without altering the subsidy structure.
The Broader Picture
The US deal does not signal a permanent shift away from the Middle East or a change in retail pricing policy. What it does offer is:
- greater supply security
- improved negotiating power
- diversification in benchmark exposure
- some relief to OMC cost structures
For households, the change will be invisible in the short term. For policymakers and energy planners, however, this marks the first meaningful diversification of LPG sourcing in decades – one that strengthens India’s position in an increasingly volatile global energy market.