In today’s Finshots, we break down India’s first-ever structured, long-term contract to source 10% of its LPG from the US, and what it means for you.

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Now, on to today’s story.

The Story

When you wake up in the morning, the first thing you probably do is make yourself a cup of chai (sorry coffee lovers). And that chai is probably made on a stove that lit up because of an LPG (liquefied petroleum gas) cylinder. We’re assuming that because most of India or about 62% of all households, uses LPG as their primary cooking fuel.

Now, LPG is composed mainly of two flammable hydrocarbons: propane and butane. And LPG used for cooking in India specifically needs to be more butane heavy. That’s because propane vaporises at very low temperatures, meaning it produces high pressure even in cold climates. That’s great if you live in a country like Canada, but not so much in a tropical country like India, where most regions are warm or hot. A propane-dominant cylinder would build too much pressure in India’s heat.

Butane, on the other hand, vaporises at higher temperatures, gives a steady flame, and packs more energy per unit of volume, which is perfect for cooking in a country like ours.

But why are we telling you all this?

Because this butane-heavy preference is exactly why India is so heavily dependent on the Middle East for LPG. We source about 90% of our imports from there, despite the US being the world’s largest LPG producer.

The reason is simple.

Middle Eastern LPG mostly comes from oil refineries. And refinery-grade LPG naturally ends up with more butane because of how crude oil breaks down during refining. So Middle Eastern LPG is butane-rich by default. Basically, a byproduct of turning crude into petrol, diesel, and jet fuel.

On the flip side, the US produces most of its LPG from natural gas processing, not refining. Natural gas streams contain far more propane than butane, which is why US LPG is propane dominant.

Naturally, this doesn’t suit India’s domestic cooking needs. And of course, freight costs from the Middle East to India have always been much lower simply because it’s closer. So the Middle East enjoyed a natural cost and product-fit advantage.

But just yesterday, the Union Minister for Petroleum and Natural Gas, Hardeep Singh Puri, announced India’s first structured, long-term contract to source LPG from the US. Think of it as a formal, predictable supply deal.

Specifically, India’s three OMCs — IOCL, BPCL, and HPCL, will purchase 2.2 MTPA (million tonnes per annum) from the US. That’s roughly 10% of India’s annual LPG imports.

Before this, India mostly relied on spot market purchases or one-off cargoes negotiated depending on price and availability. Sure, we had recurring Middle Eastern suppliers, but those weren’t fixed long-term structured contracts.

But now India has gone ahead and decided to source a significant chunk of its LPG from the US. And you’re probably thinking, “Wait… didn’t Finshots just tell me that US LPG is propane-heavy and way farther away? So why on earth are we buying from them?”

Well, you can partly blame or maybe even thank the US–China trade war.

You see, China was normally the single largest buyer of US LPG. But when the Trump administration imposed huge tariffs on Chinese goods a few months ago, China retaliated by slowing down LPG imports from the US. Suddenly, US producers were sitting on extra propane-heavy LPG they needed to send somewhere. And the price softened.

At the same time, the Iran–Israel conflict and tensions around the Strait of Hormuz pushed Middle Eastern freight costs higher due to war premiums and risk insurance. Since 20% of the world’s oil and LPG passes through Hormuz, any threat of disruption makes shipping more expensive.

And for the first time ever, the price of US LPG to India became competitive with Middle Eastern supplies.

So India stepped in, bought some discounted US LPG shipments, and then decided to lock in that advantage through a one-year structured contract beginning 2026.

The deal comes with some other benefits too.

For starters, by reducing Middle Eastern dependence by 10%, India gains some insulation from geopolitical shocks around the Strait of Hormuz. For context, a few months ago, India had backup LPG storage for only about 16 days of consumption. That’s not ideal if you’re trying to keep Indian kitchens running. So in a situation like this, diversifying supply sources strengthens energy security.

This diversification also means India now gets to work with two different pricing benchmarks. Think of them as two separate “reference prices” that the world uses to trade LPG.

Middle Eastern suppliers follow the Saudi Aramco Contract Price, which is basically the global benchmark for LPG coming out of that region. For years, India has been tied almost entirely to this number. If Aramco’s price went up, India simply had to swallow it.

But with US imports in the mix, Indian OMCs can also buy using the Mont Belvieu benchmark, the pricing standard on the US Gulf Coast.

And here’s why that matters. When you have two benchmarks instead of one, you suddenly have options, and this gives Indian OMCs some leverage. If Aramco’s prices spike, Mont Belvieu might still be cheaper. And if the US gets too expensive, the Middle East could be the better deal. This competition between suppliers could eventually lead to more favourable pricing across the board.

In fact, Middle Eastern suppliers know this and don’t want to lose India — their biggest LPG customer. So they’ve already started lowering prices to stay competitive.

And finally, there’s also a diplomatic angle. As you know, the US recently slapped a 50% tariff on some Indian goods because it feels that India sells more to America than it buys and keeps import duties on US goods high. So by picking up more US energy, India is basically trying to balance the trade relationship a little and make future negotiations a bit easier.

But there are downsides too.

US LPG is still propane-heavy, which isn’t ideal for India’s cooking mix. This means OMCs will need to blend incoming US LPG with butane or adjust infrastructure in some parts of the supply chain.

And yes, the US is much farther than the Middle East, so freight will always be costlier. The only reason US supplies became competitive this time is because China reduced imports, temporarily depressing US prices. But if China resumes normal buying, that price advantage may vanish.

But the biggest thing is that this cheaper sourcing may not automatically mean cheaper cylinder prices for consumers like us. That’s because the price you pay for a cylinder today isn’t the real price, even if you’ve given up your LPG subsidy. OMCs buy LPG at global benchmark prices, after adding freight, insurance, port charges and everything in between, and then still sell it to you at a standard rate of around ₹853 (in Delhi for a 14.2 kg cylinder). In many cases, their buying price is actually higher than what you pay.

And that gap widens even more under the Pradhan Mantri Ujjwala Yojana (PMUY), where OMCs supply subsidised cylinders to women from low-income households at prices that can be roughly ₹300 lower.

Put all of this together and OMCs end up with something called under-recovery. Basically, the loss between what it costs them to buy LPG and what they’re allowed to charge you.

In FY25, this worked out to about ₹220 per cylinder, adding up to a massive ₹41,270 crore in total under-recoveries for the three PSU OMCs. This did improve by around 35% in Q1 FY26 (April to June 2025), partly after a small ₹50 price hike that the government allowed.

But with cheaper US LPG coming in, and Middle Eastern suppliers lowering prices thanks to competition, OMCs could trim these losses by another 37%.

Now sure, the government does compensate OMCs for these under-recoveries. But lower under-recoveries simply mean that the government has to set aside less from its budget for this support. And that budget is ultimately funded by, well… taxpayers like you and me.

So yeah, if you were hoping this new US deal would directly bring down your LPG cylinder price, that’s not how this plays out.

And that’s the long and short of it.

Until next time…

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