Worst in global oil demand yet to come
Producers downgrade their market forecastsIvan Mastagarkov , Sofia
Global oil demand is seen sliding as the rebound amid the Covid-19 lockdown appears weaker than expected, international producers and traders said. The new European policy focused on low carbon economy put additional pressure on the market. Demand for oil may have peaked last year, according to BP, which says the global market for crude might never recover from the Covid-19 pandemic.
In a new report, the company lays out three scenarios for energy demand, all of which forecast a decline in demand for oil over the next 30 years. The scale and pace of the decline will be driven by the increasing efficiency and electrification of road transportation, BP said.
In a “business-as-usual” scenario, in which government policies and social preferences evolve in the same way as in the recent past, oil demand picks up slightly following the coronavirus hit, but then plateaus around 2025 and starts to decline after 2030.
In two other scenarios, in which governments take more aggressive steps to curb carbon emissions and there are significant shifts in societal behaviour, demand for oil never fully recovers from the decline caused by the pandemic. That would mean that oil demand peaked in 2019.
The new report is a major change from last year, when BP expected growth in oil demand to continue into the 2030s. The International Energy Agency (IEA) trimmed its 2020 oil demand forecast, citing caution about the pace of economic recovery from the pandemic. The Paris-based IEA cut its 2020 outlook by 200,000 barrels per day (bpd) to 91.7m bpd in its second downgrade in as many months. “We expect the recovery in oil demand to decelerate markedly in the second half of 2020, with most of the easy gains already achieved,” the IEA said in its monthly report.
“The economic slowdown will take months to reverse completely. In addition, there is the potential that a second wave of the virus (already visible in Europe) could cut mobility once again.” Analysts think the crisis will accelerate the shift away from fossil fuels towards renewable forms of energy, particularly as governments and investors heap pressure on companies to tackle the climate crisis amid growing evidence of its devastating effects.
The major crude producing countries also saw their expected earnings fade away. The Organization of the Petroleum Exporting Countries (OPEC) kept a slightly positive tone saying that world oil demand is expected to grow at a slower pace in 2021 than it thought a month ago but remained at the stance of “growing”. It also forecast an even steeper contraction in demand this year than previously predicted. BP is less bullish, which is why it is trying to pivot away from oil after a century of exploration. The company will provide investors with more detail on its new strategy, which involves a 10-fold increase in annual low carbon investments to $5bn by 2030, when it expects its oil and gas production to have fallen by 40% from 2019 levels.
EIA estimates that global consumption of petroleum and liquid fuels averaged 94.3m bpd in August. Liquid fuels consumption was down 8.2m bpd from August 2019, but it was up from an average of 85.1m bpd during the second quarter of 2020 and 93.3m bpd in July. EIA forecasts that consumption of petroleum and liquid fuels globally will average 93.1m bpd for all of 2020, down 8.3m bpd from 2019, before increasing by 6.5m bpd in 2021. EIA's forecast for growth in 2021 is 0.5m bpd less than in the August STEO. The downward revision is largely a result of lower expected consumption growth in China, which EIA now forecasts to grow by 1.0m bpd in 2021.
The IEA now predicts implied stock draws in the second half of the year of about 3.4m bpd, nearly one million bpd less than it predicted last month, with July storage levels in developed countries again reaching record highs. However, preliminary data for August showed industry crude oil stocks fell in the United States, Europe and Japan. As output cuts eased among producers from OPEC and allies such as Russia, global oil supply rose by 1.1.m bpd in August.
Crude oil production in the United States has risen in recent months after declining from 12.7m bpd in the first quarter of 2020 to a recent low of 10.0m bpd in May. EIA estimates US crude oil production increased to 10.8m bpd in August. Production has risen as tight oil operators have brought wells back online in response to rising prices after curtailing production amid low oil prices in the second quarter. The increase in total US production occurred despite shut-in production in the Gulf of Mexico as a result of Hurricane Laura. EIA expects production to rise to 11.2m bpd in September as production in the Gulf of Mexico returns.
However, after September, EIA expects US crude oil production to decline slightly, averaging just under 11.0m bpd during the first half of 2021 because EIA expects that new drilling activity will not generate enough production to offset declines from existing wells. EIA expects drilling activity to rise later in 2021, contributing to US crude oil production reaching an average of 11.3m bpd in the fourth quarter of 2021. On an annual average basis, EIA expects US crude oil production to fall from an average of 12.2m bpd in 2019 to 11.4m bpd in 2020 and 11.1m bpd in 2021.
Global refinery intake is recovering, but the pace will lag behind the demand rebound as product inventory levels are very high. In July, crude runs are estimated at 3.7m bpd above the low point in May, with another 5.6m bpd ramp-up expected by end-2020. In 2020, runs will decline by 6.9m bpd but in 2021 they will rebound by only 4.5m bpd. Runs in 2021 will be 2.7m bpd below the historical peak seen in 2018.
After two months of increases, recovery among countries outside the OPEC+ pact stalled, with production in the United States falling 400,000 bpd as Hurricane Laura forced shut-ins. At the same time, some investors want to see more action from companies such as BP, Chevron, BHP and ExxonMobil. These firms, together with 157 others deemed the world's worst polluters, were sent a letter from a group representing investors with more than $47tn in assets, calling on them to put in place strategies to achieve net-zero emissions by 2050 or sooner. Climate Action 100+ said the companies are collectively responsible for up to 80% of global industrial greenhouse gas emissions. The group said it will publish a report evaluating the progress made by companies next year in order to inform investment strategies.
“The benchmark will ensure it's clear which companies are acting on climate change as a business-critical issue,” Stephanie Pfeifer, CEO of the London-based Institutional Investors Group on Climate Change, said in a statement. “Investors will be paying particular attention to those shown to be falling short,” she added.