… higher price will incentivize more fuel switching from natural gas to fuel oil
Olusola Bello
The Organisation of Petroleum Exporting Country OPEC has expressed concern over the current hike in the price of natural gas globally.
According to the organization, the hikes in natural gas prices incentivizes substitution to more affordable fuels, fuel oil in particular. “Indeed, switching from natural gas to Liquefied Petroleum Gas( LPG) is already taking place as evidenced by reports of refineries in ARA feeding their furnaces with refinery LPG instead of natural gas. Similarly, some power plants in Pakistan and Bangladesh have already switched from LNG to refinery-derived fuel gas.”
It should be noted that natural gas serves as a fuel for industry mainly for power generation in manufacturing, refining and petrochemicals and residential sectors.
OPEC is of the view that as the ability of residential switching from natural gas to other fuel sources is limited due to the technical implications, it is looking mainly on potential implications for industry, mainly for power generation in manufacturing, refining and petrochemicals to switch from gas to oil.
Recently, natural gas spot prices have risen sharply in the US to reach $5.17/mmbtu on 20 September, compared with $1.34/mmbtu a year ago, caused mainly by freezing weather seen in the first half of 2021, which lowered stocks to around 85%, in addition to supply disruptions due to extreme weather condition, in particular Hurricane Ida which further exacerbated tightness in the market in recent weeks.
Similarly, spot prices also soared in Europe on myriad factors, including harsher winter season seen in the first half of 2021, which lowered stocks to around 75%), interruptions of supplies from Russia, concerns about the slow certification process of Russia’s Nord Stream 2 gas pipeline to Europe, lower-than-average storage levels, record prices for carbon emissions, and limited renewable power output.
“Southwest European LNG prices have been at $25.70/mmbtu as of 20 September, compared with $4.00/mmtu a year ago. According to Energy Intelligence, current natural gas prices in Europe are equivalent to $150/b of crude oil. Consequently regions that have moved aggressively toward hub-based pricing, such as the EU, are significantly more exposed to the current price volatility.”
Asian prices have also soared, on strong demand for thermal power generation amid warmer-than-average summer season this year (which lowers stocks) and problems with hydro-electric power in China, with LNG prices reaching $25.00/mmbtu on 20 September, compared with $4.75mmbtu y-o-y. furthermore, problems at Petronas’ Malaysia LNG facility added to the perception of a supply shortage.
Looking at recent levels of gas storage in main hubs, the US is the least affected of the main regions, with storage levels at around 85% of the level recorded last year at the same time.
In Europe, natural gas inventories stand at around 75% of the level normal for this time of year – the lowest level since 2013. This is due to the long winter of last year, and the rebound in industrial and electricity demand following a low due to the COVD-19 pandemic
Looking at the impact on Industry Sector, mainly Power Generation, it stated that an important underlying assumption in the OPEC Secretariat’s September 2021 MOMR is that weather conditions forecast for the upcoming winter months (October 2021 thru March 2022) prevail as a “normal winter”, in line with the average of the past 20 years. However, assuming a “harsher winter” in the upcoming winter months (October 2021 thru March 2022), which will sustain natural gas prices at high levels, will incentivize more fuel switching from natural gas to fuel oil.
This has been occasionally witnessed in the past in response to the naphtha vs gas price differential. It’s worth noting that coal prices are also reaching record prices in Europe and Asia, especially on top of strong demand coming from Asia, providing further support to switching for oil.
Looking at recent levels of gas storage in main hubs, the US is the least affected of the main regions, with storage levels at around 85% of the level recorded last year at the same time.
In Europe, natural gas inventories stand at around 75% of the level normal for this time of year – the lowest level since 2013. This is due to the long winter of last year, and the rebound in industrial and electricity demand following a low due to the COVD-19 pandemic. Moreover, natural gas production in the region has been facing a slow but steady decline. When new supplies from Russia, mostly via the Nord Stream 2 pipeline, will begin to flow to alleviate the supply crunch, is not yet clear.
“Impact on Industry Sector mainly power generation, is an important underlying assumption in the OPEC Secretariat’s September 2021 MOMR is that weather conditions forecast for the upcoming winter months (October 2021 thru March 2022) prevail as a “normal winter”, in line with the average of the past 20 years. However, assuming a “harsher winter” in the upcoming winter months (October 2021 thru March 2022), which will sustain natural gas prices at high levels, will incentivize more fuel switching from natural gas to fuel oil.”
According to a report, in the September 2021 MOMR, which provides a reasonable base case, world oil demand is estimated to increase by 5.4 mb/d and 5.2 mb/d y-o-y in the 4Q21 and 1Q22, respectively