At present, oil bears seem to be ruling, as global crude oil prices have tumbled, even after OPEC+ agreed to a symbolic 100,000 bpd production cut. Recession fears, inflation and a slowdown in industrial activity are supporting are supporting the bearish case, as oil prices reflect. Still, volatility remains high, as Russia’s inconsistent tone vis-a-vis crude and natural gas exports has traders on edge. Even though oil prices have gone down, bullish sentiment could quickly return again.
Global energy advisory service Platts Analytics warns that global oil demand could jump as large economies are going to push for a gas-to-oil switch. Platts reports that the gas-to-fuel oil switch could jump by more than 80% over the next six months, mainly driven by 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 incremental 633,000 bpd in Q1 2023, a steep increase from the current demand (Q3 2022) of 350,000 bpd. The switch, according to Platts, is directly linked to increased gas market prices, especially after that Russia decided to indefinitely suspend gas flows to Germany via Nord Stream 1. Even though gas prices have fallen back somewhat from their recent highs, current prices are still 4 times higher than last year. At the same time, LNG prices have also increased substantially.
As Platts indicated, Asian spot LNG prices reached all-time highs in August, and no real relief is expected anytime soon. Current natural gas and LNG prices are at, or near historical highs, almost five to six times higher than high sulfur fuel oil prices.
Platts states also that European clients are expected to account for 308,000 bpd growth in liquids demand in Q1 2023, almost half of the expected global share of gas-to-oil switching. For Q3 2022 Platts expects an increase of 166,000 bpd. Asian gas-to-oil switching demand is expected to reach 271,000 bpd (up 43%), compared to 136,000 bpd at present. The main overall driver is residual fuel oil, at a level of 348,000 bpd or 60% of the global shift in Q1 2023. Gasoil and LPG are expected to make up respectively 8% and 32%.
For Q3 2022 Platts expects global fuel oil demand to increase by 125,000 bpd to 7.4 million bpd. Growth is also being driven by higher demand from the Middle East, set at 170,000bpd.
LSFO is also expected to be showing a reversal of demand. After months of sluggish demand, this autumn could see a bit of a comeback. Japan already has increased its fuel oil imports in August, and Taiwan, Pakistan and South Korea are expected to enter the market in full force very soon. Another potential demand driver is the current shortage of diesel on global markets, which has led to increased prices for consumers at the pump. 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 in the next couple of months, LSFO and other fuels will likely see a price jump. Upward risk for LSFO prices could increase further during refiner maintenance season.
Current price volatility isn’t expected to cause demand destruction for fuel oil it seems. The energy crisis in Europe will be pushing markets to switch to fuel oil, perhaps even more than analysts currently anticipate. Taking into account the internal OPEC+ strategy discussion and possible output cuts, the already tightly supplied oil markets could become even tighter. The fuel oil market in particular could be very tight this winter, especially if Russia decides to export less, and if Western sanctions get implemented. Without any doubt, Russian export volumes will be missed. Gas-to-oil switching and lack of sour or mid-heavy crudes are a win-win situation for bulls.