While strong, consumption of oil proved uneven through the first nine months of 2021, interrupted by outbreaks of the coronavirus Delta variant. This led the world’s largest cartel of crude producers to downgrade its demand outlook for the full year.
The Organization of the Petroleum Exporting Countries (OPEC), however, said Wednesday that lofty natural gas prices across Europe, Asia and South America could spur widespread switching from gas to oil this winter, creating a spike in oil demand late this year and into next.
“Soaring natural gas prices, which have reached record-high levels, particularly in Europe during September, have triggered a growing interest in switching from natural gas to liquid fuels at the industrial level, as energy companies attempt to drive down cost,” OPEC researchers said in their monthly oil market report.
“Should this trend continue, fuels such as fuel oil, diesel and naphtha could see support, driven by higher demand from power generation, refining and petrochemical use,” they added.
Global natural gas supply challenges sent Henry Hub futures soaring over the past month, already motivating corners of the power sector to switch from gas to oil in Asia.
This has supported Brent crude prices in October. The international benchmark hovered above $83/bbl in intraday trading Wednesday, around its high mark for the year.
OPEC estimated 2022 demand would grow by 4.2 million b/d, unchanged from its September outlook. It projected global demand would average 100.8 million b/d in the year ahead. The cartel, however, lowered its estimate for this year. It said 2021 oil demand would increase by 5.8 million b/d when compared with the prior year, down from its previous growth projection of 5.96 million b/d.
“The downward revision is mainly driven by lower-than-expected actual data for the first three quarters of this year, despite healthy oil demand assumptions going into the final quarter of the year, which will be supported by seasonal uptick in petrochemical and heating fuel demand and the potential switch from natural gas to petroleum products due to high gas prices,” OPEC researchers said.
In addition to outbreaks over the summer, they also cited “concerns of potential renewed” travel and economic interruptions should the virus surge anew during the winter months, when a majority of the world’s population spends more time indoors and infectious diseases tend to spread faster.
That noted, OPEC expects any economic sluggishness to be temporary. The researchers said global economic growth forecasts for both 2021 and 2022 were unchanged from the prior month’s assessment at 5.6% and 4.2%, respectively.
The cartel and its oil-producing allies, OPEC-plus, said economic vigor should drive demand and necessitate increased production well into next year. The group this month approved another 400,000 b/d production increase for November, continuing a plan launched in August. It is reviewing the plan monthly but tentatively intends to extend it through much of 2022.
In addition to demand, the cartel has noted that major U.S. producers are keeping output flat to preserve cash and invest in renewable projects.
Will U.S. Production Come Back?
Analysts expect some increases in the months ahead, given demand and price strength, but most expect U.S. output to only gradually ramp up – and not in time to prevent 2021 from marking one of the weakest of the century for production.
“Shale companies are on track to spend a little more money pumping oil next year, but most aren’t opening up the spigots, even as prices top $80 a barrel,” said Mizuho Securities USA LLC’s Robert Yawger, director of Energy Futures. “Capital investments in U.S. oil patches this year are projected to come in at the lowest levels since 2004.”
In fact, the United States has begun ramping up crude imports in recent weeks.
Driven by imports, U.S. oil inventories, excluding those in the Strategic Petroleum Reserve, increased 2.3 million bbl last week. Stocks climbed 4.6 million bbl the week before that, according to the U.S. Energy Information Administration’s Weekly Petroleum Status Report (WSPR).
EIA’s WSPR for the week ended Oct. 8 is slated for release at 10 a.m. ET on Thursday – a day later than usual because of a federal holiday on Monday.
In the report last week, EIA noted that total products supplied – the agency’s terminology for demand — averaged 20.7 million b/d over the last four-week period, up 16% from the same period last year. Over that stretch, motor gasoline consumption averaged 9.2 million b/d, up 6%, while distillate fuel demand averaged 4.1 million b/d, up 16%. Jet fuel consumption spiked 64% to 1.5 million b/d.
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