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Record High Natural Gas Prices Will Send Oil Demand Even Higher

Record-high natural gas prices are prompting more utilities to switch from gas to oil derivatives, fanning the flames of an already strong oil price rally.

A Reuters report quoted an OANDA analyst as saying that there were a lot of bullish factors for oil right now, and they weren’t going away anytime soon. Among these factors was rising fuel demand due to growing economic activity and persistent fears that the coming winter will be cold and energy supplies will be tight.

This means that the current deficit on oil—and gas—markets will also continue, potentially pushing prices even above $100 per barrel, which level Bank of America said earlier this month would tip the world into a recession.

According to JP Morgan, gas-to-oil switching is still not so widespread as to lift oil prices much further.

“This means that our estimate of 750,000 barrels per day of gas-to-oil switching demand under normal winter conditions could be significantly overstated,” the bank’s analysts said in a note quoted by Reuters.

Yet, another report, also by Reuters, said that other analysts expected a lot of gas-to-oil switching this winter, which would drive oil prices higher and drive some UK energy suppliers out of business.

“This has never happened before at such a global scale. The market has always tried to substitute from costly oil to much cheaper natural gas,” Reuters quoted a SEB commodity analyst as saying.

Now the tables have turned, and both commodities are soaring amid not only forecasts for a cold winter, however inaccurate they might be at this point in time, but also expectations for higher energy demand during this winter season.

Meanwhile, supply remains tight. OPEC+ refused to boost production by more than 400,000 bpd monthly. Russia’s President Vladimir Putin said the country will step up gas deliveries to Europe, but some analysts doubt that it has the capacity to do so, even if it is willing to do it without expecting concessions in return, which is likely.

“Currently, the Russian domestic gas market remains tight, with its inventories running low, output already near its peak and winter looming in Russia as well, limiting gas export capacity,” said Adeline Van Houtte from the Economist Intelligence Unit.

Source: Oilprice.com | This text was excerpted from the media outlet cited on October 8, 2021 and is provided to Noia members for information purposes only. Any opinion expressed therein is neither attributable to nor endorsed by Noia.