Higher oil, natural gas prices to see some demand destruction

Oil&Gas Materials 22 October 2021 09:49 (UTC +04:00)

BAKU, Azerbaijan, Oct.22

By Leman Zeynalova – Trend:

Higher oil and natural gas prices will see some demand destruction, Trend reports with reference to Fitch Solutions.

“Energy and power prices have been soaring in recent months, in response to record shortages of coal and natural gas in multiple markets creating a positive feedback loop for energy commodities as consumers switch fuels, pushing prices higher across the board. Underperforming renewables are also placing strain on power grids with unseasonal weather remaining a key risk. We except energy price volatility to remain high throughout the Northern Hemisphere Winter with prices expected to climb even further before eventually topping out as demand falls in response to elevated prices and warmer weather, paring back gains but leaving prices substantially higher than long-term averages,” Fitch Solutions said in its report.

However, the company believes that there is a high risk that prolonged or extreme weather events could see stockpiles remain lower than average for longer, setting the stage of continued high energy prices (above our current forecasts) throughout 2022 at least, adding to the risk of energy consumption curtailment at the expense of economic output.

“High energy prices globally are leading to a wide range of issues including lower output, rising production costs and the exacerbation of supply chain issues. The impacts to industry are spreading rapidly. Rising energy cost are supporting gains in crude oil prices as markets in Europe and Asia seek relief by switching fuels where possible add near-term demand for oil products, such as heating oil. We expect oil prices to continue to be elevated throughout Q4 2021 as natural gas prices are set to remain high as concerns for severe weather remain a major risk for volatility. This in turn will put downward pressure on refiner margins, although the switchover to Winter fuel blends will see refinery throughput curbed supporting recent price gains for transport fuels. Elevated price pressures have yet to see a surge in upstream production, although we expect an upturn investment to spur output.”

The use of crude oil and fuel products such as diesel and fuel oil will increase as power generators switch to cheaper alternatives where possible to make up for the gap in power generation, according to Fitch Solutions.

“Higher oil and natural gas prices will see some demand destruction as industrial user pare back consumption on rising costs, tightening stretched supply chains further. Escalating energy prices will fuel inflationary pressures which will force more hawkish monetary policy cooling economic growth.”


Follow the author on Twitter: @Lyaman_Zeyn