[ENG] Fall in gas demand in EU lowers its price

Gas price at three-month low

European gas prices have reached a three-month low, as demand from industry and households has fallen. In the first half of 2022, the EU reduced its gas consumption by 11%. However, the price declines should halt in the coming months. North-westernEurope started the winter heating season unusually early. European countries are trying to fill gas storage facilities, which results in record prices for LNG. The cost of chartering an LNG vessel on the Atlantic has jumped by 500%, to USD 397,500 per day.

Companies are shifting to gas

Currently, lower gas prices are motivating companies to consume this fuel. This phenomenon should lower demand for oil, but not lead to lower prices. OPEC forecasts that oil demand should increase by 2.6 million barrels per day in 2022 and 2.3 million in 2023. These numbers reflect a downward revision of 0.46 and 0.36 million barrels compared to the previous month. Despite the lower demand, we observed several factors that increased the oil price.

Oil price above USD 95

The Energy Information Agency (EIA) suggests that massive cuts in OPEC+ oil supply will delay the rebuilding of oil reserves, even taking into account lower demand expectations. The Brent crude oil price has increased by more than 15% since the OPEC+ announcement about cutting production by 2 million barrels per day. The price stabilised above USD 95 in the second week of October. OPEC crude oil output in August-September rose to 29.8 million barrels per day – it is around 3 million barrels below the target. There are also production problems around the world.

Oil production forecasts

EIA cuts US oil production forecasts for 2023. Presently, it assumes an increase in supply of 0.6 million barrels per day, what implies a second consecutive downward revision. September forecasts assumed 0.8 million barrels, and June ones 1.05 million. A decline in drilling across the Permian Basin limits the scope for upward revisions. In Nigeria, output is at the lowest level since 1988. Lack of other oil sources (no cooperation with Venezuela, strained relations with Saudi Arabia) and the limiting of output in OPEC may increase the crude oil price.

The market is temporarily stabilised by the huge release of stocks from the Strategic Petroleum Reserve, injecting 7.7 million barrels into the market (1.1 million barrels per day). The interventions are likely to be halted soon.

The shortage of refining capacity

However, the situation is exacerbated by the shortage of refining capacity. The cost of diesel in Europe reached almost USD 180 per barrel. More than 25% of petrol stations in France were out of the fuel due to refinery strikes. Malfunction hit Shell’s Pernis oil refinery; the facility is Europe’s largest and critical for diesel supply. In the US, prices increased to USD 190 on the West Coast, the highest ever. The low level of the Mississippi is limiting barge shipments, and fires and breakdowns are resulting in unexpected repairs.

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The text was published in CEE Economic Monthly 7/2022 on the 5th of November 2022.