The last barrel

Oh, my goodness! It baffles my sensibilities to recount all the dire predictions by analysts and consulting firms about the short-term/long-term effects of Covid-19 on the oil industry. The unrelenting onslaught of “we will never recover” or “nothing will ever be the same” seemed short-sighted and did not take into account the role oil and gas plays in driving our economy and perpetuating our way of life. Let’s take a look back at some of the more ominous forecasts.

Never is a long time. In July 2020, Citigroup analysts forecasted demand growth for refined oil products would never return to the levels it reached before the Covid outbreak. “As the global economy restarts, fewer people will fly and use their cars,” analysts including Edward Morse wrote in a report. “With meetings going virtual and business no longer needing to move employees around the world in the same way as before, there will be powerful forces pushing a transition away from oil.

At its peak, the virus wiped out up to 30% of total oil demand. Citi said that oil will more likely be at $45/bbl, rather than $60/bbl in the long term. But “oil product demand growth will falter significantly, change its contours and never return to pre-Covid-19 rates of growth.” With its more pessimistic take on demand, Citi also forecasted oil price would most likely remain lower than anticipated, with longer-term supply costs falling and ample production capacity still offline.

What a difference a year makes. During the second week of May 2021, data from the CDC indicated that Covid-19 cases in the U.S. averaged fewer than 40,000 new infections/day during the week. That’s a 21% improvement over the week before and the first time the daily average has dropped below 40,000 since September 2020. New cases also declined in 37 states, and not one state reported an increase. Deaths from the coronavirus are at their lowest level since last July—about 600/day. Nationally, hospitalization rates are also falling significantly. Thanks to the vaccines, the U.S. (and eventually the world) is finally winning the battle against Covid-19. So, what does this mean for our industry?

Crude demand will recover quickly. The head of Vitol Group, the world’s largest independent oil trader, expects crude demand to come roaring back in 2021 and 2022 as, the world emerges from the pandemic. Demand for crude will increase by 7 to 8 MMbopd by the end of 2022, up from current levels, and producers will be stretched to meet that surge, according to Vitol CEO Russell Hardy. “We will need all eight cylinders to get through 2022,” Hardy said. “We believe $70 to $75/bbl is an entirely sensible outcome for the third quarter,” Hardy said, making a rare specific call on oil prices.

It’s a bullish call for a solid recovery in global petroleum use after the pandemic caused demand for jet fuel, diesel and gasoline to collapse. Vitol handled more than 7 MMbbl of crude and products a day in 2020, giving it keen insight into fluctuations in global supplies and demand. Global oil demand remains about 3.5 MMbopd below pre-pandemic levels, Hardy continued. Consumption should rebound by year-end, as Covid-19 vaccines continue to be rolled out, lockdowns are lifted, and travel for leisure and business resumes. Demand for jet fuel will continue to lag a rebound in other petroleum products, with demand expected to be approximately 1.5 MMbpd below pre-pandemic levels by year-end. However, the shortfall in aviation fuel consumption will be offset by a similar sized 1.5-MMbpd increase in use for other oil products, such as petrochemicals used in plastics. “The gap is slowly closing, as economies reopen and Eastern growth takes us higher.” Still, Hardy cautioned that a recent spike in Covid-19 cases in India and other virus hotspots could derail the recovery.

More than half of the 1 Bbbl of excess inventory stored in response to the market collapse in 2020 have been expended. The excess inventory draw-down will be largely completed by the third quarter of this year, even with planned production increases by OPEC. About 2 MMbopd are currently being extracted, and that pace is forecast to continue through June, July and August.

More crude required. OPEC+ will have to step up production to meet the expected increase in demand. However, in mid-May 2021, Iran’s President Hassan Rouhani indicated that major sanctions on his country—including those affecting oil—will soon be lifted. According to Rouhani, “the main agreement has been made” with the U.S. to restore the nuclear deal from 2015, and a final agreement will soon follow. Under the most optimistic forecasts, Iran could increase production to 4 MMbopd from 2.4 MMbopd. Analysts at Citigroup said it’s more likely that Washington will allow Tehran to boost exports by 500,000 bopd during the third quarter.

U.S. shale hobbled. Even with Iran, the increase in production will have to come from OPEC, because U.S. shale producers are finally exhibiting capital discipline, Hardy said. The statement suggests U.S. shale production has been damaged and won’t be able to significantly respond. OPEC+ has decided to revive just over 2 MMbopd of the 8 MMbopd it’s been keeping offline. The supply will be returned in stages over the three months to July. The cartel has suggested it will downgrade its next full-scale ministerial meeting, a signal the coalition may stick with plans to gradually revive oil production.

Just another bust cycle. Although this latest downturn was more dramatic than previous events, in reality, it was just another bust cycle. And despite opportunistic statements about green-takeover, once we fully defeat Covid-19, consumption and demand growth will return to pre-event levels. Until proven otherwise, hydrocarbons still drive our economy and are delivering the reliable, cost-effective energy we require to get us through this difficult situation and beyond.

https://www.worldoil.com/news/2020/7/1/citigroup-says-oil-demand-will-never-reach-pre-pandemic-levels

About the Authors

Craig Fleming

World Oil

Craig Fleming Craig.Fleming@WorldOil.com