European refineries, power, heating plants eyeing distillates, heavy fuels as alternative to gas: traders

Demand for alternatives to natural gas that largely centered around LPG is beginning to fan out to middle distillates and heavy fuels amid complications with the storage and transportation of LPG, according to traders.

Many refineries have been driving use of LPG as a substitute to natural gas, amid elevated gas prices, which are four times where they were a year ago, according to one trader. Germany has been particularly badly hit by the higher gas prices, given its heavy reliance on gas and its weak position following the closure of the Nord Stream pipeline among other supply lines from Russia.

The current length in the propane market as well as limited demand so far from the heating sector has pushed down the price of LPG, making it another attractive alternative to natural gas. While this continues to provide support for industries as a substitute, LPG distributors have reported that gasoil is increasingly being used in power and heating plants due to its improving refinery margins and complications with storage and transportation of propane.

"Strained propane logistics are availing the switch to gasoil", an LPG distributor said. "The use of propane is already maxed out too, so it is difficult to cater for much more."

An inland source said they had ordered several railcars of LPG in September that only began loading last week and are yet to be delivered.

Furthermore, supply constraints are likely to worsen with the switch to winter LPG demand imminent once activity from the heating sector reignites.

"Heating demand is coming any day now, people are scared of high prices and will stock up as soon as they can," an inland source said, adding that once storages were depleted, there would be a battle to accumulate supply for the new year.

With several refineries, such as TotalEnergies Antwerp, expected to withhold their LPG exports in 2023, supply in the propane market could be at an imbalance at the start of the new year.

Rising demand for 50 ppm as alternative fuel

Demand for 50 ppm gasoil and 10 ppm ULSD has risen significantly in recent weeks, according to traders, with renewed buying interest from heating and power plants.

Gas-to-oil switching contributed to a surge in demand in the Rhine a few weeks ago, according to a trader, although that has slowed more recently. "I think the full effect [of gas-to-oil switching] will be shown when there is a real gas outage," the trader said.

According to another source, industries are particularly keen on heating oil as an alternative to other distillates such as diesel and kerosene, given its lower cost.

"I am seeing more demand on [the industrial] side [for heating oil], " the source said. "There have been a lot of inquiries on heating oil to use instead of gas."

Stadtwerke Munchen, Germany's largest local utility, has postponed converting from coal to gas at one of its plants and reopened two heating oil-fueled plants.

"[The two oil heating plants] will use diesel," the company said, "With these measures, Munich's natural gas consumption will be reduced and the energy mix broadened."

Fuel oil traders have also noted increased gas-to-oil switching in European markets, notably across the 1%S complex. Sources have reported increasing HSFO usage for power generation further east, such as Pakistan.

In Europe, sources have said that the onset of winter could prompt higher fuel oil demand from the power sector; however, robust gas storage levels and steady LNG inflows are expected to provide a supply buffer.

Availability continues to be reported as tight across 1%S markets, with increased demand ahead of winter. This has caused premiums to move up in both Northwest Europe and the Mediterranean, sources said.

According to data from S&P Global Commodity Insights published Sept. 6, global gasoil demand from gas-to-oil switching is forecast to grow 7,000 b/d between the fourth quarter of 2022 and the first quarter of 2023. In contrast the data showed that residual fuel demand for gas-to-oil switching would rise 98,000 b/d over the same period.