Oil demand recovery on track but risks remain

Oil demand and prices are on course for a long, slow rebound from the worst of the Covid-19 pandemic, but the possibility of a double-dip recession — while unlikely — remains a potential drag on the recovery, according to Argus chief economist David Fyfe.

The demand recovery is already outstripping increases in supply, leading to an initial drawdown of the roughly 1.1bn bl of inventories that built up earlier this year, Fyfe told the Argus Online Crude Forum today.

But it will take at least until mid-2021 for that surplus to be worked through, and oil demand may remain 2mn b/d below pre-pandemic levels in the fourth quarter of 2022 even if the global economy stages a relatively smooth recovery, he said.

The stock overhang remains particularly acute for refined products, especially jet fuel, in OECD markets. Limits on long-haul air travel are likely to persist through 2021 and 2022, leading to sustained weakness in jet fuel demand.

Barring major surprises, Brent crude prices may climb towards $50/bl by the end of this year and continue to increase in 2021, Fyfe said, citing figures from Argus Consulting. But the market is likely to remain cautious and prices will probably stay below $60/bl on a trend basis through 2021.

Crude demand in China — the only major economy that is expected to grow this year — is also slowing. Chinese refinery runs have been strong but are likely to fall from September onwards, which will eat into import demand amid high stock levels, according to Tom Reed, Argus' vice-president of China crude and products.

Several major uncertainties could affect the recovery. The consensus among analysts is for a "U-shaped" economic rebound from the Covid-19 slump, but there is arguably a 10-15pc chance that a renewed surge in coronavirus cases and more blanket lockdowns could lead to a second recession, Fyfe said. This could lead to a second consecutive annual contraction in oil demand in 2021 and so is a "significant concern" for oil producers. Oil demand this year is likely to be 8.2mn b/d below 2019 levels.

Another big question is whether the Opec+ group of producers, which agreed deep supply cuts earlier this year, can maintain supply discipline. And further uncertainty stems from the possibility that a victory for US Democratic presidential candidate Joe Biden in November's election could lead to a softening of sanctions on Iran and Venezuela, potentially allowing a portion of some 2mn b/d of sanctioned crude back on to the global market.

Tomorrow's world

Longer term, the Covid-19 pandemic is accelerating structural changes that were already underway, Fyfe said. Trade's share of global GDP peaked in 2010, but the coronavirus outbreak may lead to the reshoring of some manufacturing activity and a consequent reduction in trade of manufactured goods, although not primary commodities.

The long-term health impacts of the pandemic may put a stronger focus on air quality, to the potential detriment of emissions-intensive fuels such as coal and diesel. And the rising importance of personal protective equipment and food packaging may collide with environmental pressure to limit single-use plastics, with profound consequences for the petrochemical sector.

One of the biggest questions is over the switch to lower-carbon fuels as part of the energy transition, which some estimates put at a cost of $100 trillion by 2050. The shift will continue, but doubts over its affordability given the pressure on government finances mean that some elements — such as the growth of electric vehicles — may slow from the original timelines. This could support gasoline demand in the short term, Fyfe said.

By Kevin Foster