Right now, the oil bears appear to be reigning supreme as global crude oil prices have fallen, even after OPEC+ agreed to a token 100,000 bpd production cut. Recession fears, inflation and a slowdown in industrial activity support the bearish scenario, as reflected in oil prices. Still, volatility remains elevated as Russia’s inconsistent tone on crude and natural gas exports worries traders. Even if oil prices have fallen, bullish sentiment could quickly return.
Global energy consultancy Platts Analytics warns global oil demand could surge as major economies push for a switch from gas to oil. Platts reports that the switch from gas to oil could jump more than 80% over the next six months, primarily due to extremely high natural gas and LNG prices.
According to Platts Analytics, power producers, refiners and major industries are expected to increase liquids demand by an additional 633,000 bpd in the first quarter of 2023, a sharp increase from current demand (Q3 2022) of 350,000 bpd. The change, according to Platts, is directly linked to rising gas market prices, particularly after Russia decided to suspend gas flows to Germany via Nord Stream 1 indefinitely. have retreated somewhat from their recent highs, current prices are still 4 times higher than last year. At the same time, LNG prices have also risen substantially.
Related: Putin threatens to completely cut off power to the West if price caps are imposed
As Platts reported, LNG spot prices in Asia hit all-time highs in August, and no real relief is expected anytime soon. Current natural gas and LNG prices are at or near historic highs, nearly five to six times higher than high sulfur fuel prices.
Platts also says European customers are expected to account for 308,000 bpd growth in liquids demand in the first quarter of 2023, almost half of the expected global share of the switch from gas to oil. For the third quarter of 2022, Platts expects an increase of 166,000 bpd. Asian demand for gas-to-oil conversion is expected to reach 271,000 bpd (+43%), compared to 136,000 bpd currently. The main global driver is residual fuel oil, at a level of 348,000 bpd, or 60% of the global change in the first quarter of 2023. Diesel and LPG are expected to represent 8% and 32% respectively.
For the third quarter of 2022, Platts expects global fuel oil demand to increase by 125,000 bpd to 7.4 million bpd. Growth is also driven by higher demand from the Middle East, pegged at 170,000 bpd.
LSFO should also show a reversal in demand. After months of sluggish demand, this fall could see a small comeback. Japan already increased its fuel oil imports in August, and Taiwan, Pakistan and South Korea are expected to enter the market in force very soon. Another potential demand driver is the current shortage of diesel in global markets, which has led to higher prices at the pump for consumers. In many parts of Europe, diesel prices are currently higher than gasoline prices. When global refiners decide to take the bait and maximize diesel production over the next two months, LSFO and other fuels will likely see a price spike. The upside risk to LSFO prices could increase further during the refiner maintenance season.
The current price volatility is unlikely to lead to the destruction of heating oil demand, it seems. The energy crisis in Europe will push markets to switch to fuel oil, perhaps even more than analysts currently expect. Given the internal OPEC+ strategic discussion and possible production cuts, the already tightly supplied oil markets could become even more strained. The fuel oil market in particular could be very tight this winter, especially if Russia decides to export less, and if Western sanctions are put in place. Undoubtedly, we will miss Russian export volumes. The shift from gas to oil and the lack of sour or mid-heavy crudes is a win-win situation for bulls.
By Cyril Widdershoven for Oilprice.com
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