Gas Shortage Prompts Power Plants to Switch to Oil, Boosting Demand

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IEA expects energy crunch to lift oil demand above pre-pandemic levels next year

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That increase means that the IEA, which serves as the energy watchdog for the wealthy nations of the Organization for Economic Co-operation and Development, expects the world’s thirst for crude to exceed pre-pandemic levels next year.

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Oil prices posted early gains on Thursday after the IEA’s report was released, with Brent crude rising 1.2% to $84.16 a barrel in early trade. US crude futures climbed 1.1% to $81.35 a barrel, closing a new seven-year high. Both benchmarks have risen more than 60% this year, with the energy market gaining momentum in recent months due to tight supplies elsewhere.

“Great shortage of natural gas, [liquefied natural gas] And the supply of coal, stemming from the global economic recovery, has sharply increased prices for energy supplies and is triggering a massive switch to direct crude use for oil products and power generation,” the Paris-based organization said in its report. The report said, adding that power generation plants, fertilizer producers, manufacturing operations and refineries are all affected.

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Shortages of relatively low-carbon but expensive natural gas—analysts say the commodity is two to three times more expensive than equivalent amounts of oil—and a trend to switch to more emissions-intensive fuels, such as crude products, come weeks ahead of leaders. Is. The world descends on Glasgow for UN-led climate talks.

Analysts say the IEA’s forecast of an additional 500,000 barrels per day in demand from the energy crisis may be too conservative.

“We’ve never had a situation where oil is so cheap” [versus gas] So we just don’t have empirical evidence “how much oil demand can grow,” said Bjarne Schildrop, chief commodities analyst at SEB Markets. “It could very well exceed a million barrels,” he said.

Relatively weak natural-gas inventories for the time of year and low air levels in Europe with the prospect of a cold Northern Hemisphere winter leading to economic recovery after the pandemic, coal shortages in China and soaring fossil-fuel prices. mailed. Benchmark European gas prices have risen 184% over the past three months.

IEA Executive Director Fatih Birol said on Wednesday that extreme weather events – such as Hurricane Ida in the Gulf of Mexico, droughts and widespread flooding that disrupted hydroelectric power in China and Brazil – have also contributed to the energy crisis. He said supply choke points, including pandemic-delayed maintenance work, mean that natural-gas outages are currently 40% higher than average.

As a result, analysts already see an increase in a trend known as gas-to-oil switching, whereby power plants that run on oil are fired or converted to run on crude products. is being switched. Goldman Sachs cited this in raising its oil-price forecasts late last month, while energy consulting firm Rystad Energy said it expects the Asian power sector to exceed 400,000 barrels a day over the next six months. oil will be used.

In its report, the IEA saw a similar trend, citing provisional data showing “inexplicably high demand for fuel oil, crude and medium distillates for power plants” in China, Japan, Germany, France and Brazil.

Nevertheless, supplies from oil producing countries remain constrained. The IEA reduced its supply forecasts for this year and next for countries outside the Organization of the Petroleum Exporting Countries and its allies, citing Hurricane Ida and maintenance-related outages in Canada and Norway.

Meanwhile, despite an increase in output from OPEC+, the IEA said the alliance would produce 700,000 barrels per day less than the world’s appetite for its crude oil in the fourth quarter of 2021, but also said that if the producer group is able to lift its production restrictions. If it continues to reduce it may shift back to over-supply in 2022.

Long-term reports from OPEC and the IEA in recent weeks have shed light on the cartel’s impact on the global energy system. While the IEA said on Wednesday that clean-energy spending should triple to avoid further electricity-market turbulence, the OPEC report said developing-world population growth and wealthier countries’ hatred of fossil fuels were driving the cartel. Well positioned to profit from selling oil. the coming decades.

David Hodari and [email protected]

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