Soaring prices set stage for eventual reversal of oil, gas demand

Value Exchange International

08/03/2022 12:00

By Sabrina Valle, Arathy Somasekhar and Liz Hampton
    HOUSTON, March 8 (Reuters) - Oil prices running at their
hottest level in 14 years are poised to cut post-COVID pandemic
fuel demand as consumers react to surging pump and power prices
by pulling back on spending and travel, top energy executives
warned on Monday.  
    Global oil futures hit as much as $139 a barrel this week as
gasoline, diesel and power prices to multi-year highs. The
surges come as oil buyers shun cargoes from the world's No. 2
oil exporter, Russia, over its invasion of Ukraine, exacerbating
existing shortages of oil and natural gas. 
    Energy executives attending the CERAWeek energy conference
in Houston said prices were approaching levels that would reduce
demand. And consumers, now paying 47% more than a year ago to
fill up their cars, agreed.
    "There's always a budget, right?" said Adam Bielawski,
filling his tank at a gas station in Toronto on Monday.
    "Gas is kind of a necessity, right," he added, while noting
he will soon face a lengthier work commute that could require
belt-tightening.
    Energy price shocks could quickly "get to a point where
people are going to make decisions not to use the product
because they can't afford it," agreed Andy Brown, chief
executive of Portuguese energy firm Galp Energia  GALP.LS . 
    "There is a chance we get demand destruction" because of the
recent price spikes affecting fuels, he told Reuters on Monday,
speaking at the CERAWeek conference. Galp, an oil and gas
producer moving into renewable fuels, worries the prices will
undercut attention on moving to clean energy, he said. 
    Rises in gasoline and diesel prices were adding more pain to
consumers in Europe, which have been struggling with spiralling
power bills. 
    On Monday, the wholesale price in Spain for electricity hit
500 euros ($540) per megawatt hour, Repsol  REP.MC  Chief
Executive Josu Jon Imaz told attendees at CERAWeek in Houston, a
peak-hour record and double the level of December.
    "We can't sustain this level prices," Imaz said. "We need an
(energy) transition, not a destruction."
    John Hess, CEO of U.S. producer Hess  HES.N , called on the
United States and the International Energy Agency (IEA) to
coordinate the release 120 million barrels of oil, and commit to
a similar release in coming weeks. 
    "This is an emergency," he said, lamenting that 60 million
barrels already released from strategic reserves were not
enough. 
    "The prices where they are, are not sustainable," said
Tengku Taufik, CEO of Malaysia state-owned oil company Petronas.

    DEMAND SQUEEZE 
    Worries about demand destruction due to sky-high prices have
 emerged in recent days as disruption to Russian exports leaves
the global oil market short of supplies.
    The IEA, which advises nations on energy supplies and
policy, last month increased its forecast for this year's oil
demand on expectations for continued economic growth in the wake
of the coronavirus pandemic. 
    It raised its 2022 forecast by nearly 800,000 barrels per
day, predicting a need for an additional 3.2 million bpd this
year, to well above the 100 million bpd pre-pandemic level of
2019. 
    But meeting that demand without Russian energy supplies is
unlikely, experts warned. There is not enough spare capacity
worldwide to compensate for the loss of Russian oil, OPEC
Secretary General Mohammad Barkindo said.  urn:newsml:reuters.com:*:nL2N2VA2G6 
    Analysts at JP Morgan Chase & Co and Bank of America have
predicted oil could hit $185 to $200 per barrel if Russia's oil
exports are broadly shunned. 
    U.S. lawmakers have called for bans on Russian oil but
President Joe Biden's administration has sanctioned Russian oil
tankers only, leading trading houses and refiners to avoid
supplies carried on Russian Sovcomflot tankers.
    Britain and Canada also barred Russian vessels or oil from
landing at their ports in protest at Moscow's invasion of
Ukraine. Russia calls its actions in Ukraine a "special
operation".  urn:newsml:reuters.com:*:nL2N2VA1U0 
    U.S. and Canadian oil advocates have called on Biden to stop
favouring renewable energy over fossil fuels, and renew pipeline
projects and sidelined oil and gas drilling auctions.
    Producers can increase output if the administration approves
projects that are "already in the queue but have been largely
delayed", said Brigham McCown, founder of energy trade group
Alliance for Innovation and Infrastructure, and the former head
of Alaska's Alyeska Pipeline.
    "If energy prices continue to skyrocket, we will see
significant inflationary pressure that will in turn lead to
potential demand destruction. I don't think that's overnight,
but clearly within the next couple months, yeah, our economy is
going to take a significant hit," he warned. 

 (Reporting by Sabrina Valle, Arathy Somasekhar and Liz Hampton
in Houston and Alexander Shummer in Toronto; Editing by Kenneth
Maxwell)
 ((Sabrina.Valle@thomsonreuters.com; +1 469-691-7668;))