Natural gas shortage drives power plants to burn oil for energy

The energy market is experiencing turbulent times. The rapid recovery in demand has strained the markets, triggering the price of gas and coal, two polluting energy sources that have gained relevance in recent months to meet the needs of the economy. Faced with the sharp rise in the price of these two raw materials, power generation is shifting from gas to oil, the last link in the chain.

Renewable energies are the future, they assure from the International Energy Agency (IEA), but today they are still unable to generate all the energy that is demanded at all times, especially if the weather conditions do not accompany (wind, rain …).

As a result, power generation plants and some companies are having to turn to gas, coal, and ultimately oil to generate power. This demand has counterbalanced some markets that were paralyzing their investments in the face of a bleak future for fossil fuels. The result is rising prices on just about everything.

The IEA explains in its latest report that “the acute shortage of supplies of natural gas, LNG (liquefied natural gas) and coal has caused a skyrocketing price for energy supplies, which is causing a massive shift towards products derivatives of petroleum and the direct use of crude oil for power generation “. The problem is that the burning of crude oil and derivatives is extremely polluting, which should limit this practice in advanced countries.

About 500,000 more barrels

This trend could increase oil demand by an additional 500,000 barrels per day between September and the first quarter of 2022. The result of this unexpected demand is already being seen in the prices of crude oil futures. A barrel of Brent exceeds 84 dollars, while West Texas, the benchmark crude in the US, exceeds $ 81 per barrel. Both types of barrel could add up to their eighth consecutive week registering price increases.

“The supply crisis is affecting everything from power generation plants even fertilizer producers, the factories and the refineries “, they assure from the IEA.

Preliminary data for August already indicates that there is unusually high demand for fuel oil, crude and middle distillates coming from power plants in several countries, including China, Japan and Pakistan in Asia; Germany and France in Europe; and Brazil, where the low levels of the reservoirs have forced generators to look for alternative sources to satisfy the demand for electricity.

The latest IEA projections assume that these high levels of consumption will persist during the first quarter of 2022 and that, given the degree of tension in the LNG and coal markets, greater amounts of petroleum products will be consumed in the power plants of several countries.

In addition to the additional demand for energy, petroleum products can substitute for gas in some industrial centers. For example, in China and India many companies use generators that run on petroleum derivatives to produce energy and continue operating. This change could increase demand for crude oil by some 50,000 barrels a day. On the other hand, “we assume that there will also be some shift towards naphtha (another hydrocarbon) among Indian fertilizer producers who will contribute 30,000 more barrels of demand of naphtha “.

“Our current projections of additional oil demand are based on weather patterns considered normal in winter, so the forecast is sensitive to temperatures in regions with high demand. A warmer winter could lead to less additional demand and a colder could cause a further increase in demand “, they explain from the IEA.

This is how the oil market remains

This has contributed to an upward revision of the oil demand forecast for 2021 and 2022, by 170,000 barrels per day, 210,000 barrels per day (annual average), respectively, according to the IEA.

Global demand for crude oil will reach 99.5 million barrels per day in 2022, above pre-COVID-19 levels, driven by the increase in the price of gas and coal.

The shortage of supply and the high price of natural gas and coal “is causing a massive diversion” towards oil and its derivatives for the generation of electricity “and industrial uses, the IEA points out in its monthly report on the oil market.

Strong demand, coupled with the slow recovery of OPEC + production, along with the effects of Hurricane Ida on production in the US and maintenance shutdowns in other producers such as Canada and Norway, have led to higher prices. of crude oil in seven years.

However, the IEA foresees a “strong” increase in production from this month October, driven by recovery in the US after Ida, the end of these maintenance operations in other countries and the rebound in OPEC +, even if this alliance will continue below its usual levels of extraction.

The current OPEC + production pact plans to increase its supply by 400,000 barrels per month until September 2022, and the report released yesterday by the organization suggests that for now it will maintain that commitment.

The agency document states that the OPEC + production increase “has not changed market expectations, so current supply and demand forecasts will mean a short-term reduction in inventories, at least until the end of the year.” .

An obstacle to growth

This will mean “a strong incentive for prices, which in turn will further stress the oil market,” he adds. Tension in the supply of the oil sector has been compounded by problems in the refining sector in two major consumers, China and India. Institutions such as Bank of America Merrill Lynch believe that oil could reach $ 100 a barrel by the end of the year.

The report warns that high energy prices, together with problems in global supply chains, are already causing a downward revision of growth forecasts in the world (5.9% this year and 4 , 7% in 2022).

Faced with this situation, the IEA urges increased investment in renewable energy, “but this has to happen quickly or world energy markets will face a difficult path in the future.”