Switching to take into account a growth in demand of 633,000 bpd in the first quarter of 2023
European gas, Asian LNG six times more expensive than fuel oil in energy
European refiners heavily exposed to the Russian-Ukrainian warrise in the price of gasoline
Global oil demand resulting from the switch from gas to oil could jump more than 80% in the next six months after soaring natural gas and LNG prices push more power producers, refiners and industrial users to burn fuel oil and other liquid fuels, according to Platts Analytics estimates.
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Refiners, power producers and major industries will account for 633,000 bpd of incremental liquids demand in the first quarter of 2023, compared to about 350,000 bpd of incremental demand in the third quarter of 2022, Platts Analytics estimated.
Overnight gas prices across Europe rose on September 6, buoyed by lingering market concerns over winter gas supplies in Europe after Russia’s Gazprom announced the indefinite suspension of gas flows to Germany via the Nord Stream gas pipeline.
Platts assessed Europe’s gas price benchmark TTF for the coming month at a record high of 319.98 euros/MWh on August 26, which fell back to 237.98 euros/MWh on September 6, but was still four times higher year on year. Data from S&P Global Commodity Insights showed this.
LNG prices have also climbed since the start of the Russian-Ukrainian war, with plant outages around the world adding to these increases.
As a result, most Asian countries also faced an energy crisis and refrained from buying to reduce soaring energy import bills as prices rose. Spot LNG prices in Asia rose in a narrow Atlantic basin, with the benchmark JKM index approaching all-time highs again in August. The daily physical valuation reached $71.01/MMBtu on August 25, the highest level since March 7, when the benchmark reached a record high of $84.76/MMBtu.
On an equivalent Btu basis, benchmark prices for gas in Europe and LNG in Asia are currently five to six times higher than high-sulphur fuel oil values, prompting a widespread switch from gas to oil across sites capable of using alternative fuels.
In Europe, refiners, power producers and large industries will account for 308,000 bpd growth in liquids demand in the first quarter of 2023, according to Platts Analytics, which is equivalent to about half of the world’s share of the gas-oil transition. The growth figure exceeds 166,000 bpd, or 47%, in the third quarter of 2022. Asian gas-oil switching demand growth is estimated to reach 271,000 bpd, or 43% of the total, against 136,000 bpd during the current quarter.
Residual fuel oil will account for 348,000 bpd, or 60%, of the global gradual shift to oil in the first quarter of 2023, according to data from Platts Analytics, with LPG accounting for 32% and diesel making up the rest of the increase at 8% .
Gensets lead the fuel switch in terms of the largest sector, but refiners also buy natural gas as a refinery/additional feedstock fuel for hydrogen production. Refiners can minimize their natural gas purchases by maximizing refinery still gas production, using liquid feedstocks such as naphtha and LPG for hydrogen production, and replacing fuel gas used for heaters and boilers with LPG and fuel oil.
“While natural gas prices are skyrocketing, naphtha and high sulfur fuel oil are currently low. We know that southern European countries are consuming more fuel oil due to the move away from gas. ” Rasool Barouni, head of refining economics at Platts Analytics, said.
Globally, Platts Analytics expects fuel oil demand to increase by 125,000 bpd quarter-over-quarter to 7.4 million bpd in Q3 2022, driven by higher demand of electricity production and an acceleration of maritime trade as the world economies continue to open up. Growth will be driven by the Middle East, where it is expected to increase by 170,000 bpd, largely from the power sector due to warmer weather.