Global oil demand growth will hit a wall sooner than many think, thanks in part to expanding substitution of natural gas for oil in multiple applications worldwide, said analysts at Citi Research, a unit of Citigroup Global Markets Inc.
Improving vehicle fuel economy is the other main factor putting downward pressure on oil demand, Citi said, but the assault from natural gas is coming on multiple fronts with an intensity that is only expected to grow, in some cases significantly, and that’s largely thanks to the U.S. shale revolution.
For instance, once the next wave of global liquefied natural gas (LNG) export projects comes online beginning in 2016 and in earnest around the 2017-2019 period, currently tight LNG markets should loosen materially, Citi said. “This raises the prospect of lower spot prices and a greater incentive for gas-for-oil substitution to spread and accelerate globally. Hence, the assumption that substitution outside of the U.S. starts to accelerate post 2016.
“It is important to note how bullish for global gas consumption this gas-for-oil substitution could be, as 1 million b/d of oil roughly equates to 45 million metric tons of LNG, so 2 million b/d of switching ex-U.S. could go a long way toward absorbing the potential wave of LNG coming to global markets at end [of] decade.”
What shales did for gas production they’re now doing for U.S. oil production, of course. In December, U.S. oil production was up by 1 million b/d year over year and net U.S. oil imports were down by 1.5 million b/d. Despite an improving economy last year, U.S. oil demand fell 2.1%, or 0.4 million b/d, from the prior year, according to Citi.
“This drop in oil demand is partly the result of natural gas getting substituted for oil in a variety of sectors,” Citi said. “This development is taking root in the U.S. due to the large gasp between natural gas prices and oil product prices, but it should transfer across the globe as in many countries the spread between oil and gas is still substantial…”
And even where the oil-natural gas spread is compressed, such as in China, environmental concerns are driving consumption away from oil and toward gas, Citi said.
Indeed the demand sectors of cars/trucks, residential, power generation, petrochemicals, shipping, rail, and “other” transport are all seeing oil being replaced by natural gas, Citi said. Advocates of natural gas vehicle (NGV) adoption in the United States might find it to be a frustrating irony that sanctions limiting Iran’s ability to import gasoline have made that country the world leader in NGVs, according to Citi.
“Since 2005, the number of NGVs has jumped from below 50,000 to almost 2.9 million in 2011,” Citi said. “The exponential growth in NGVs is expected to continue on a global basis with countries such as China continuing to ramp up their refueling infrastructure…
“China already has over 40,000 LNG-fueled trucks, and exponential growth is expected to continue as many city governments have policies in place to promote them. By end-2010, more than 80 cities in China had more than 1,000 CNG/LNG filling stations, and another 1,000 are planned for construction.”
New York, London and Hong Kong are all adapting at least some of their taxi fleets to liquefied petroleum gas (LPG), but so are Las Vegas, Baltimore, Pittsburgh, Columbus, OH, and Grand Rapids, MI, according to Citi.
In the United States, the shift to NGVs is about economics, Citi said. While the economy has improved, it hasn’t move the needle on demand for diesel fuel to a corresponding degree. Companies adding NGVs to their fleets include UPS, FedEx, Walmart, Frito Lay, Royal Dutch Shell and others.
For LNG-fueled trucking, this year will be critical, Citi said, as the first mid-size LNG engine comes to market from Westport-Cummins. Previous engines have been underpowered or too heavy. “The coming to market of a mid-size LNG engine just as the LNG refueling infrastructure is reaching greater penetration, with natural gas still priced under $5/MMBtu, could mean that the state is set for another potential oil demand shift.”
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