Natural gas prices have surged this year as Russia restricts gas flows to Europe, a move that is widely seen as retaliation for sanctions imposed over its invasion of Ukraine. The increase has prompted many industrial consumers, including refiners and power plants, to switch from gas to oil. Scorching temperatures have also spurred demand for air conditioning, particularly in the Middle East, where a significant amount of oil is burned during summer to generate electricity.
“Natural gas and electricity prices have soared to new records, incentivizing gas-to-oil switching in some countries,” said the IEA, which advises most major economies on energy policy. “With several regions experiencing blazing heatwaves, the latest data confirm increased oil burn in power generation, especially in Europe and the Middle East.”
Even as consumption accelerates, the IEA doubts that oil markets will face a supply crunch, with stockpiles projected to swell at a rate of 900,000 barrels a day for the rest of this year.
Russia’s oil output has proved more resilient than expected in the face of international sanctions, while supplies are being topped up by the release of barrels from governments’ emergency reserves announced earlier this year.
These releases are scheduled to continue through to October, and could be extended for longer, Toril Bosoni, head of the IEA’s oil market division, said in a Bloomberg television interview.
“We still have a lot of emergency stocks in our member countries,” she said. “This is something that will be discussed once this current release is completed.”
Still, Russian production may fall again in the coming months as new European sanctions bite, and little further assistance can be expected from its allies in the Organization of Petroleum Exporting Countries, the IEA said.
OPEC+ offered only a “symbolic” output increase of 100,000 barrels a day for September at its latest meeting, despite a visit by US President Joe Biden to group leader Saudi Arabia. The alliance is unlikely to shift course by announcing further substantial hikes in the months ahead because its spare capacity is limited, according to the IEA.
“They’re worried about spare capacity — it’s basically only Saudi Arabia and the UAE that are holding any substantial amount of spare capacity,” said Bosoni. “There’s a lot of uncertainty on the demand side, this is also something that OPEC is factoring in.”