The rally in natural gas prices is spilling over into oil as petroleum substitutes for natural gas, especially as northern hemisphere heads into winter.
As European and Asian natural gas prices surge in response to higher electricity demand and scarce natural gas supplies, oil is being substituted for natural gas (and to some degree electricity) in different sectors and countries. That includes LPG for refineries, diesel for generators and fuel oil where there is fuel switching capacity at power plants. In addition, we expect slightly higher crude burn, mainly in China and Japan. The following table summarizes ESAI Energy's estimates of additional demand in 000 b/d. For more on the market impact, see ESAI Energy's September Global Crude Oil Outlook.
In Europe, the increase in oil use could add about 180,000 b/d to demand through the first quarter of 2022. The biggest impact, however, will be in Asia. Countries such as Japan, Pakistan, and Korea — are shifting to fuel oil. Diesel for generators plays a role here too, particularly in China. Japanese kerosene and the direct burning of crude in Japan and China will be another source of increased demand. In sum, we expect Asian oil demand to be up about 500,000 b/d over the course of the winter.
Brazil and Mexico have already seen relatively high fuel oil demand in recent months. Brazil is grappling with reduced hydropower because of a drought and is competing for LNG from abroad. Mexico is rethinking its shift out of fuel oil in the power sector despite environmental concerns. The region could easily see an additional 70,000 b/d of fuel oil and diesel in the coming months.