Gas-to-oil switching could prompt OPEC+ reaction: BP economist

The OPEC+ alliance could be forced to react to the current spike in gas prices if it means a colder-than-average winter forces meaningful volumes of oil into the power generation sector, BP energy economist Jorge Leon said Sept. 22.

The more prosperous group of OECD nations are currently facing low oil inventories, below the five-year average, and a significant call from power generation for oil would "clearly tighten the market," he said during the S&P Global Platts European Refining Virtual Conference.

S&P Global Platts assessed LNG Japan/Korea DES Spot cargoes at $27.266/million BTU Sept. 22, compared with $4.750/million BTU on the equivalent date in 2020.

The strong gas price can support fuel oil and gasoil, according to participants during a panel discussion at the conference. These are the oil products most likely to be used in power generation to mitigate soaring costs of natural gas.

Although there have been some high estimates for oil being drawn into the power generation sector, there is clearly scope for more barrels to make their way into the sector if high prices and low availability of gas persists, Leon said without giving estimates.

"There is definitely scope [for oil switching] and I think we are seeing signs of tightening in the market. Propane prices for example have reached their highest level since 2014... It really depends on the weather, of course" he said.

Platts assessed propane CIF NWE large cargoes at $754.25/mt Sept. 21, its highest since July 25, 2014.

August industrial gas demand in North West Europe fell to its lowest in at least five years, with lower consumption mainly seen in the Netherlands and the UK, analysts at S&P Global Platts Analytics said. This aligns with the anecdotal evidence of at least three refineries in these two countries making the switch from burning gas to LPG, with the Dutch TTF currently trading well above equivalent NWE liquids prices, they added.

Investment bank Goldman Sachs on Sept. 19 estimated that global oil demand would rise by 900,000 b/d from October-March if winter temperatures were one standard deviation below seasonal norms. With most of the switching likely in Asia and Europe, the bank estimated that up to 1.85 million b/d of additional global oil demand could emerge if all suitable power, industrial and domestic operations switch to oil-based fuels.

S&P Global Platts Analytics estimates that current high LNG prices could trigger fuel switching from gas to oil, where feasible, with up to 320,000 b/d of additional oil demand over the next six months in Asia and Europe.

OPEC and its allies, in a coalition known as OPEC+, are gradually raising their crude oil output by 400,000 b/d each month, with ministers meeting monthly to review the plans and assess market conditions.

UAE energy minister Suhail al-Mazrouei said Sept. 21 that the producer group had sufficient spare capacity and can adjust its supplies to the market as needed.

"I think we have ample volumes we can bring to the market when they are required," he said at a gas industry conference in Dubai.

Mike Muller, head of Asia for trading house Vitol, said on a separate webinar that electricity providers dependent on gas supplies are already looking into fuel switching.

"[The price of] LNG is now higher than alternatives," he said Sept. 22 on a Gulf Intelligence webinar. "Every consultant has been getting out their notepads to see where the switching can occur-- LNG to coal or liquids. LNG prices have underpinned fuel oil in a very big way."

But, he added, many power plants in western countries no longer have the capability to burn liquid oils, so the choice will primarily be between gas and coal.

"A lot of the capacity to switch has been dismantled for environmental reasons," Muller said. "The number of power stations that can interchangeably come on to the grid and burn the cheapest fuel, which is fuel oil, is low. So that leaves coal."