Summary

Crude oil and natural gas prices are linked in markets where gas contracts are indexed to oil, though the United States shows the opposite pattern. In India, pricing formulas, contract structure, and fuel substitution determine how strongly one market influences the other through specific channels rather than a fixed ratio.

Introduction

Crude oil and natural gas trade on separate exchanges and follow separate supply chains, yet a move in crude oil prices is often reflected in gas markets within weeks. In India, this connection runs through a formal pricing formula for domestic gas and through indexed LNG contracts for imports, as the relationship has direct consequences for city gas distributors, industrial users, and traders on the Multi Commodity Exchange (MCX).

What Is the Relationship Between Crude Oil and Natural Gas Prices?

Crude oil and natural gas share similar extraction and production processes, which gives them a baseline correlation. That correlation strengthens sharply where gas contracts are indexed directly to oil, a structure long used in Asian LNG trade through formulas such as the Japan Crude Cocktail. Under this structure, a rise in crude oil prices raises the contracted gas price even without any change in gas supply or demand.

The United States shows the opposite pattern. Henry Hub prices move on domestic production, storage levels, and weather with little regard for WTI or other crude benchmarks. India works between these two models. APM gas tracks crude via a formula. A growing share of imported LNG, though, prices off spot benchmarks that behave more like the US market than the crude-linked ones. That split causes natural gas markets in India to be pulled by both forces at once, with the balance shifting as import volumes rise or fall.

Market	Key Gas Benchmark / Pricing Model	Link to Crude Oil	Primary Price Drivers
Asia LNG	Oil-indexed LNG contracts	Strong	Crude oil prices, contract formulas
United States	Henry Hub	Limited	Domestic production, storage, weather, demand
India – APM Gas	Government-defined formula	Direct	Crude oil prices and prescribed pricing formula
India – Imported LNG	Spot/gas-linked benchmarks	Indirect / Limited	Global gas prices, LNG supply and demand, shipping costs

What Factors Influence the Relationship Between Oil and Natural Gas Prices?

Six factors usually affect how tightly the two markets track each other, from contract structure to currency movement.

Factor	What It Affects	Example
Contract indexation	How directly gas tracks crude	Long-term Asian LNG deals priced off crude formulas
Fuel substitution	Demand shifts across fuels	Plants shifting between gas, oil, and coal on relative cost
Weather and season	Short-term demand spikes	Winter heating demand across North Asia and Europe
Storage levels	Sensitivity to supply shocks	Low pre-winter storage sharpening price volatility
Freight cost	Landed price of imported LNG	Longer shipping routes are raising the cost of delivered cargo.
Currency movement	Rupee cost of dollar imports	A weaker rupee raising India’s import bill at an unchanged dollar price

Fuel substitution is especially important in India. City gas distributors and industrial buyers can shift toward liquid fuels when gas turns relatively expensive. That flexibility limits how far the two commodities can diverge before demand itself narrows the gap.

How Do Changes in Crude Oil Prices Affect Natural Gas Markets?

India’s clearest transmission channel is the APM formula. Following the Kirit Parikh Committee reforms, domestic APM gas is priced at roughly 10% of the prevailing Indian crude oil basket, subject to a floor and ceiling, and revised monthly by the Petroleum Planning and Analysis Cell (PPAC). A fall in crude oil prices generally reduces the APM price, provided the floor has not already been reached, easing input costs for city gas distributors and supporting margins where retail prices do not fall by the same amount.

A crude oil increase works in the opposite direction, though the ceiling caps how far APM gas can rise regardless of how high crude goes. Imported LNG adds a second channel. Long-term contracts indexed to crude respond directly to oil price moves, while spot cargoes respond more to shipping availability. So the two import streams can move at different rates even when crude itself moves sharply.

When Is the Impact of Oil Prices on Natural Gas Most Significant?

The strength of this link is not constant; it depends on timing.

• Around monthly APM revisions: the shift from crude to domestic gas pricing is most evident right after each formula update.
• Sharp crude supply shocks move fastest: OPEC+ decisions, sanctions, or conflict in producing regions can cause crude oil prices to increase rapidly, and indexed LNG contracts carry that increase through with little delay.
• When the APM floor or ceiling is tested: further crude price moves stop feeding through to domestic gas pricing once the formula reaches either boundary.
• Tight LNG spot markets loosen the link: Scarce cargoes can cause spot prices to diverge from crude-linked contract prices, since buyers compete mainly on availability rather than formula pricing.

Outside these windows, gas prices usually respond more to their supply and demand than to crude.

How Can Investors and Businesses Track These Energy Market Trends?

Tracking this relationship in practice relies on several dependable sources.

• Follow exchange contracts: MCX trading lists crude oil futures at 100 barrels per lot, a 10-barrel mini contract for smaller positions, and natural gas futures at 1,250 mmBtu per lot, providing a direct venue for monitoring both commodities and the price gap between them. 
• PPAC notifications carry the clearest official signal: Monthly APM revisions and the underlying Indian crude basket figures show exactly how the formula-based relationship is operating at a given time.
• Compare international benchmarks: Brent, WTI, Henry Hub and Asian spot LNG each capture a different part of the picture. Reading them side by side shows whether a gas price move is following crude.
• Platform-level tools add another layer: Jainam provides commodity futures data, historical charting, and margin calculators for comparing crude and gas price movements before a position is placed.

Conclusion

The relationship between crude oil and natural gas prices in India works through identifiable mechanisms rather than a fixed formula alone. Pricing policy, contract structure, and fuel-switching behavior decide how strongly one market pulls the other. Reading the relationship accurately means watching which mechanism is active, not assuming the two commodities move in close correlation by default.

Final Takeaways

• India’s domestic gas price under the Administered Price Mechanism (APM) uses a formula based on the Indian crude oil basket.
• Global oil and gas prices have partly decoupled since the US shale boom, though oil-indexed Asian LNG contracts keep the link active.
• Weather, storage, freight costs and fuel switching decide how strongly a crude move passes through to gas prices.
• The link tightens during APM revisions and crude supply shocks and loosens during calm, well-supplied periods.
• MCX contract data and PPAC notifications offer the clearest signal of the state of the relationship.