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Europe's Covid-19 impact to stretch into 2021

Forecaster predicts that countries will take a managed approach, spreading the outbreak over many months

Consultancy Rystad Energy expects the impact of the coronavirus pandemic on European countries, and thus their energy demand, to last “the entirety of 2020 and, in some cases, into 2021”, as nations opt for a more gradualist quarantine method of tackling the outbreak rather than the East Asian lockdown approach. 

CEO Jarand Rystad concludes that the lockdowns rolled out by countries such as China to slow the rapid spread of the virus are not sustainable in the long term in Europe as injection rates will simply spike again once the measures are withdrawn. 

Instead, Rystad expects countries to have to manage widespread exposure with measures tailored to limit infections to a manageable burden on ICU beds—unless a vaccine is found prior to that. 

As such, European nations, depending on the number of ICU beds they have per head of population, will be tackling Covid-19 for “four to 10” months. In Rystad’s ‘managed infection’ scenario for France, for example—where it keeps the number of infected people at a level where its ICU capacity can cope—the outbreak would last until the spring of 2021. Most of the French population would then have been exposed to and recovered from the virus, albeit with 260,000 fatalities. 

Demand impact 

The impact on global oil demand of this sustained period of battling Covid-19 will be “dramatic and unprecedented”, says Rystad’s head of analysis Per Magnus Nysveen. The firm sees a 10mn bl/d demand hit, dwarfing the downward pressure already coming from the supply side from the collapse of the Opec+ agreement. 

Transport fuel demand will be particularly affected. The sector’s 50mn bl/d contribution to global oil demand is forecast to fall by 7mn bl/d, with 2mn bl/d of this coming in the US alone by April. 

Pressure on storage capacity is, in Nysveen’s view, the first major crunch point for the market, with Rystad seeing only 4mn bl of capacity left available globally. Production will need to be shut-in once tank tops are hit, but Rystad sees output continuing until then as long as the price stays above the short-run marginal operating cost of producing the next barrel. 

“The only way that things can balance is to pull back on production, but reactions from the supply side take a long time,” says Nysveen. This suggests, for example, that North Sea fields could continue producing, at least temporarily, even at sub-$20/bl. At under $25/bl, Canadian oil sands may be the first to be shut in, given prices lower than the marginal cost of production, he predicts. 

“Even if WTI falls to $20/bl within the next month, we would not expect to see any reaction from [US shale production] for at least 2-3 months,” Nysveen continues.

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