Both LNG and diesel prices in Europe this winter will depend on the severity of cold temperatures and how quickly inventories can be replenished, as the Russia-Ukraine war has stretched supply chains for both fuels that now have to be pulled in from Asia, Russell Hardy, chief executive of Vitol, said June 26 at the Energy Asia 2023 conference in Malaysia.
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The commodity trader's views on the prices of the two winter heating fuels reflect market concerns that ongoing weakness in prices could be short lived and volatility is still on the cards due to the uncertainty of weather conditions.
Most new regas stations to bring LNG into Europe have been fast tracked, in the Netherlands, France, Italy and in particular in Germany, and most of those have got fairly big commitments in terms of supply contracts, Hardy said.
"That gas is arriving and is going into storage, and by October that storage will be full. What happens after that is really up to the weather because [gas] demand for a cold winter is 10 to 15 billion cubic meters higher across Europe than a warm winter," he warned.
Hardy said the incremental winter demand of 10 to 15 Bcm is a big number in comparison to Europe's 60 Bcm of storage, and if winter starts early, around October-November, then people will begin to worry about storage stocks lasting all the way through till March, simply because of insufficient storage.
Europe needed to grab as much gas as it could after losing all the pipeline gas from Russia, he said.
He said in 2021 Asia consumed about 272 million tons of LNG, in 2022 it consumed around 252 million tons, and is probably going to get back to 260 million tons in 2023.
"So Europe's thirst for LNG has taken some permanent supply from Asia, plus all the new supply from the US and absorbed it all," Hardy said. "Asia's accessing today less gas than it could access in 2021."
Hardy said that the price caps on Russian oil, which are at $60/b for crude, $100/b for high value products and $45/b for low value products, mean that a G7 service provider company is not permitted to buy above those prices.
"So the business has moved largely to the Russian traders who are happy to take on board these risks," he said.
However, Russia still produces about 11 million b/d of crude and condensates and refines and exports a lot of products, with nearly all the crude finding its way East.
"It's as if we picked up two and a half million barrels a day of refining in the West and brought it to the East because that product is no longer available in the West. So the effect has been to strengthen product markets in the Atlantic basin because there is less available product supply," Hardy said.
He said this means that if Europe needs diesel, it has to reach a lot further because the resupply is going to come from the Middle East, India or North Asia, and those supply chains have lengthened and in turn caused the markets some stress.
"It's the gasoline season today but going into winter, there will be there will be some stress around diesel markets if we haven't built enough inventory simply because the resupply chain is now quite long," Hardy said, adding that if you want to buy a diesel cargo in Korea, its 20 days forward and then 30 - 35 days of shipping to Europe.
Meanwhile, Hardy said Vitol's estimate for peak oil is at around 2030, after looking at factors like the pace of electric vehicles.
"We put a peak in about 2030 and then a gradual decline out to 2040. So, it [demand] will be largely the same as we are today by 2040. This is a sort of realistic expectation and then a rapid decline thereafter as the EV fleet in energy transition takes over," he said.
More of the oil decline will be in Europe and the US as electrification takes over and energy transition will take longer in Asia, he said.
"This shouldn't be seen as a negative. It should be seen as an opportunity and an opportunity to enter into different types of businesses," Hardy said.