The substitution of oil for gas in power generation will boost oil demand

Rising oil supplies escalating concerns about the deteriorating economic outlook have pushed oil prices down about $30 a barrel their peak in June. In terms of product prices refinery margins, the decline was even steeper as a sharp rise in refinery activity compounded with sluggish demand during the northern hemisphere summer.

At the same time, gas electricity prices have surged to record highs, prompting some countries to switch gas to oil. As heat waves hit several regions, new data confirm that oil consumption in power generation has increased, particularly in Europe the Middle East, but also across Asia. European industries, including refining, are also making fuel switches. We have revised up our forecast for global oil demand for the rest of the year, but still expect growth to slow 5.1 MB/d in Q1 '22 to 40 MB/d in Q4. Global oil demand is expected to rise by 2.1 million barrels per day (BPD) to 99.7 million BPD in 2022 a further 2.1 million BPD next year, when it will surpass the pre-freeze level of 101.8 million BPD.

The decline in Russian oil supplies was less than previously forecast. While exports of crude oil refined products to Europe, the United States, Japan South Korea have fallen by nearly 2.2 million barrels a day since the war began, rerouting to India, China, Turkey other countries, combined with a seasonal rise in Russian domestic demand, has mitigated upstream losses. As of July, Russian oil production was only 310,000 b/d below pre-war levels, while total oil exports fell by only 580,000 b/d. The EU's ban on imports of Russian crude oil refined products, which took full effect in February 2023, is expected to lead to further declines, as around 1 million BPD of products 1.3 million BPD of crude oil will find buyers.

Opec + agreed in early August to raise its September supply target by just 100,000 b/d, significantly less than the 648,000 b/d increase slated for July August. The group noted that "severely limited" spare capacity should be "used very cautiously in response to severe supply disruptions," suggesting that Opec + is unlikely to increase production significantly further in the coming months.

Releasing more emergency reserves by October would further ease the pressure. With OECD sector inventories still about 290 million barrels below the five-year average, such inventories could help ease market tensions. But with supply increasingly at risk of disruption, another rise in prices cannot be ruled out.

Demand side

Soaring use of oil to generate electricity convert gas to oil is boosting demand. Global demand growth forecasts for 2022 were raised by 380,000 BPD to 2.1 million BPD. Growth masked relative weakness in other sectors, as well as slower growth, which fell 5.1 million BPD at the start of the year to less than 100,000 BPD in the fourth quarter. Global oil demand is now expected to be 99.7 million b/d in 2022 101.8 million b/d in 2023.

The supply side

Global oil supplies reached a post-pandemic high of 10.5m b/d in July as maintenance work in the North Sea, Canada Kazakhstan wound down. Opec + raised total oil production by 530,000 b/d non-OPEC + by 870,000 b/d. By the end of the year, world oil supplies will have increased by a further 1m b/d.

The downstream refining

Refinery capacity was added by 1.1 million b/d in July will be added by a further 350,000 b/d this month, which will take output to a Z-high level seen since January 2020. That was faster than demand for refined products, leaving refinery margins sharply below June's all-time high. The world's refineries are now on track to add 2.6 million b/d in 2022 1.3 million b/d next year.

inventory

Globally observed inventories edged down by 5 million barrels in June, with reductions in OECD non-OECD inventories partially offset by an increase in oil on water. Total OECD industry inventories rose by 6.2 million barrels to 2.681 billion barrels, but remained 292.1 million barrels below the five-year average. The release of government inventories into the market in June totaled 33.8 million barrels, the largest amount since March.

Supplied by Russia

In July, Russian oil exports fell by 115,000 b/d to 7.4 million b/d about 8 million b/d at the start of the year. Since the war, flows of crude refined products to the US, UK, EU, Japan South Korea have fallen by almost 2.2m b/d, with two-thirds of them diverted to other markets. Export revenues fell to $19bn in July $21bn in June, due to lower export volumes lower oil prices.

For more information about the energy trading platform, please consult the financial service platform, warehousing logistics platform, hazardous chemicals business license processing platform bulk energy trading platform manufacturer Eurasia International Energy Trading Market Management (Jiangsu) Co., LTD.

Source: Minmetals Futures Micro Service