Oil prices continue to rise on the prospect of a rebound in fuel demand as economies begin to reopen. But there is a large difference between oil demand rising from recent lows and actually growing relative to pre-COVID-19 trends. In other words, demand destruction on the order of nearly 30 million barrels per day (mb/d) may have been brief, but we are a long way from a 100-mb/d oil market.
In fact, some are wondering whether the world will ever get back to 100 mb/d of oil demand. Even oil executives have their doubts. Royal Dutch Shell's (NYSE:RDSa) CEO Ben van Beurden recently suggested that a rebound is unlikely, even looking out beyond 2020. “We do not expect a recovery of oil prices or demand for our products in the medium term,” he said.
“We basically have a crisis of uncertainty. Uncertainty about demand, about prices,” van Beurden said in a video address when presenting first quarter results at the end of April. “Maybe even uncertainty about the viability of some of our assets given all of the logistical issues we have.”
BP’s CEO Bernard Looney largely admitted the same thing. The COVID-19 pandemic could entrench certain societal changes – more teleworking, less commuting, less flying – that could permanently erode a portion of consumption. “It’s not going to make oil more in demand. It’s gotten more likely [oil will] be less in demand,” Looney said in an interview with the FT.
“I don’t think we know how this is going to play out. I certainly don't know,” Looney said. “Could it be peak oil? Possibly. Possibly. I would not write that off.”
Not everyone agrees. Exxon Mobil's (NYSE:XOM) chief executive Darren Woods recently said that the long-term trends “have not changed.”
A new study from IHS Markit also sees oil demand mostly returning to “normal” by the end of 2021. “It may be hard to comprehend now. But barring a second wave of the pandemic, nearly all pre-COVID demand could return by the second half of 2021,” Roger Diwan, vice president of financial services at IHS Markit, said in a statement. The firm sees oil demand rising to 96-98 percent of pre-coronavirus levels by the second half of next year.
“If that transpires it could even lead to a market squeeze in the medium-term as supply destruction hinders the ability of supply to keep up with recovering demand,” Diwan added.
A separate report from the Oxford Institute for Energy Studies sees something similar. The report eyes a supply deficit as soon as the third quarter of 1.5 mb/d, on the back of severe supply curtailments and a rebound in demand. The report says the market could be undersupplied in 2021 by as much as 5 mb/d. But the inventory overhang means that Brent trades in the $40 to $50-per-barrel range for most of next year.
The Oxford report also sees demand mostly arriving back at pre-pandemic levels at the end of 2021.
The problem with that notion is that a second wave of coronavirus infections is completely plausible, perhaps even likely (something both the IHS and the Oxford reports admit are big uncertainties). Time will tell.
But the permanent changes in some behaviors, along with the ongoing market share gains for electric vehicles, go beyond oil market cycles. If demand does return, and boom follows bust, the shift to cleaner energy will only accelerate, and that’s before even considering any green stimulus measures now under consideration.
One important issue that the Oxford report raises is how Saudi Arabia responds after the immediate crisis subsides. With the prospect of peak demand looming, there are “advantages” for Saudi Arabia if it pursues a high-volume/lower price strategy, the Oxford study says. That is, Saudi Arabia may want to ramp up production in the years ahead in order to monetize its remaining reserves as demand peaks and begins to decline.
Cutting by too much in an effort to push prices to $50 per barrel or above would clear the way for a return of U.S. shale. Better to keep the market well supplied, capture more market share, and box out a rebound in shale drilling.
Other analysts agree. “Will OPEC+ then hold on to production cuts in order to opt for price rather than volume once the oil price moves back to $50/bl thus once again chase the oil price to $60/bl and $70/bl by holding back supply?” Bjarne Schieldrop of SEB wrote in a report. “If so, this would again give preference to shale oil volume rebound in exchange for a higher oil price to OPEC+.”