European Oil Demand Set to Spike as Gas Prices Surge Beyond $100 a Barrel Equivalent
Amid cold winter weather and fast-depleting inventories, Europe's natural gas prices jumped on Monday to a two-year high to levels of over $100 per barrel oil equivalent, which now makes burning oil for industrial use more cost-effective.
Dutch TTF Natural Gas Futures, the benchmark for Europe's gas trading, surged by 4% in Amsterdam on Monday, to the highest level since February 2023. The first proper winter in Europe with prolonged periods of cold snaps since the 2022 energy crisis is depleting the EU stockpiles of natural gas, which have dropped to the lowest level since the crisis for this time of the year.
As a result, European prices are rallying, and with most of Europe now relying on LNG imports for its natural gas supply, it has recently become more efficient for industries to burn oil and coal – wherever possible – as they are cheaper feedstocks than gas right now.
'We have already seen increased gas-to-fuel oil switching and gas-to-gasoil is next,' said Eugene Lindell, head of refined products at consultancy FGE. 'This is one of the pillars of gasoil strength right now.'
The gas-to-oil switch could boost oil demand in Europe, and also in Asia, in the first quarter, potentially giving more room and reason for OPEC+ to return more barrels to the market.
The high natural gas price is a bullish tailwind for oil, Bjarne Schieldrop, Chief Analyst Commodities at SEB bank, said in a note on Monday.
Even 10ppm diesel is now cheaper than natural gas. Consumers of natural gas all over the world will now opt for any kind of oil product rather than gas if their natural gas price is set by in the LNG market, Schieldrop said.
'Europe and Asia will all lean towards consuming more oil and more coal if they in any way can do so.'
The surge in European natural gas prices comes as storage levels are tightening faster than in the past two years.
Stockpiles are already at their lowest for this time of year since 2022, according to ING analysts.
'Inventories are only 49% full compared with 67% at the same time last year,' ING's commodities strategists Warren Patterson and Ewa Manthey said.
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