Gas Shortage Forces Power Plants to Switch to Oil, Boosting Demand

That increase means that the IEA, which acts as the energy watchdog for the wealthy nations of the Organization for Economic Cooperation and Development, expects the world’s thirst for crude next year to exceed pre-pandemic levels.

Oil prices added to early gains on Thursday following the release of the IEA’s report, with Brent crude rising 1.2% to $84.16 a barrel in early trading. U.S. crude futures climbed 1.1% to $81.35 a barrel, on course to close at fresh seven-year highs. Both benchmarks have increased more than 60% this year, accelerating in recent months due in part to tight supply elsewhere in the energy market.

“An acute shortage of natural gas, [liquefied natural gas] and coal supplies stemming from the gathering global economic recovery has sparked a precipitous run-up in prices for energy supplies and is triggering a massive switch to oil products and direct crude use for power generation,” the Paris-based organization said in its report, adding that power-generation plants, fertilizer producers, manufacturing operations and refineries are all affected.

Relatively weak natural-gas inventories for the time of year and low wind levels in Europe have coincided with the post-pandemic economic recovery, coal shortages in China and the possibility of a cold Northern Hemisphere winter to send fossil-fuel prices soaring. Benchmark European gas prices have leapt 184% in the past three months.

IEA Executive Director Fatih Birol said Wednesday that extreme weather events—such as Hurricane Ida in the Gulf of Mexico, droughts stymieing hydroelectric power in China and Brazil, and widespread flooding—have also contributed to the energy crunch. He added that supply choke points, including pandemic-delayed maintenance work, meant that natural-gas outages are currently 40% higher than average.

As a result, analysts have already observed a rise in the trend known as gas-to-oil switching, whereby power plants that run on oil are fired up or ones that can be converted to run on crude products are being switched over. Goldman Sachs cited this in raising its oil-price forecasts late last month, while energy consulting firm Rystad Energy said it expects the Asian power sector to use 400,000 more barrels a day of oil than it previously did in the next six months.

In its report, the IEA observed a similar trend, citing provisional data showing “unseasonably high demand for fuel oil, crude and middle distillates for power plants” across China, Japan, Germany, France and Brazil.

Even so, supply from oil-producing nations remains constrained. The IEA trimmed its supply forecasts for this year and next for countries outside of the Organization of the Petroleum Exporting Countries and its allies, citing outages from Hurricane Ida and maintenance-related outages in Canada and Norway.

Meanwhile, despite increased production from OPEC+, the IEA said the alliance would produce 700,000 barrels a day fewer than the world’s appetite for its crude in the fourth quarter of 2021, but added that if the producer group continues to unwind its production curbs then it may shift back to supplying more than needed in 2022.

Long-term reports in recent weeks from OPEC and the IEA have shone a spotlight on the cartel’s influence over the global energy system. While the IEA said on Wednesday that clean-energy spending must triple to avoid further power-market turbulence, OPEC’s report said that developing-world population growth and wealthier nations’ aversion to fossil fuels leaves the cartel well-positioned to profit from selling oil for decades to come.

Write to David Hodari at [email protected]