Oil demand will get a bigger boost this year as Europe scrambles to burn crude to generate power instead of sky-high natural gas

• Record-high prices for natural gas in Europe are prompting power generators to burn oil instead, the IEA said Thursday.
• The agency raised its global oil demand forecast for 2022 by 380,000 barrels a day due to that increased consumption.

Rocketing prices for natural gas in Europe are prompting companies to switch from gas to oil for power generation, spurring demand for crude this year and into the next, the International Energy Agency said.

In a report Thursday, the IEA noted that higher supplies and worries about the global economy have pushed down oil prices since their peak in June. according to the International Energy Agency.

"At the same time, natural gas and electricity prices have soared to new records, incentivising gas-to-oil switching in some countries," the agency said, noting the switch is happening in European industry, such as refining.

"Forward pricing signals that this situation could persist until at least the end of 2023," it added.

Natural gas prices have surged in Europe as Russia chokes off supply via Nord Stream 1 and other pipelines, in an effort to hit back at western energy sanctions. Dutch TTF natural gas futures are up more than 640% from a year earlier.

Given the increased use of oil, the IEA lifted its global demand forecast for 2022 by 380,000 barrels a day. It now sees demand at 99.7 million barrels a day this year, despite the risk of economic slowdown.

"These extraordinary gains, overwhelmingly concentrated in the Middle East and Europe, mask relative weakness in other sectors, but will propel demand higher by 2.1 mb/d to 99.7 mb/d in 2022 and by a further 2.1 mb/d to 101.8 mb/d in 2023," it said.

The EU has also committed to cut use of gas by 15% from August to March next year in the face of the supply crunch. "We estimate that this will increase oil consumption by roughly 300 kb/d for the next six quarters," the IEA said.

Meanwhile, heatwaves in several regions have led to more oil being burned for power generation, to meet the need for air conditioning and other cooling — in Europe and the Middle East in particular. Portugal's usage jumped 173% from April to May, while Spain, the UK and Japan saw more moderate increases, according to the agency's data.

On the other side, the IEA noted that world crude supply notched a post-pandemic hig of 100.5 million barrels a day in July, as it noted that Russia is producing far more oil this year than it previously expected. It now sees supply rising by 1 million barrels per day by the end of the year.