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Oil demand faces an uncertain future

A recovery in demand is key to getting the oil market back into balance. But both short and long-term prospects are clouded

Saudi Arabia and Russia’s move to unconstrained supply after the breakdown of the Opec+ accord may have kicked off the 2020 oil price crash, but it is the demand impact of Covid-19 that has taken over as its primary driver. It is thus unsurprising that the demand outlook was a hot PE Live 1 topic.

In the short-term, one of the trickiest aspects is that there are a number of moving parts and all of them are difficult to call, says Andy Brogan, global oil and gas leader at EY. There is the macroeconomic picture, but also demand for different refined products, as well as the highly unusual storage logistics situation to unwind.

“Does the economy come back quickly, or smoothly but slowly, or do we have a sawtooth-shaped recovery if we have additional lockdowns?” he asks. Even if and when that is answered, the demand rebound may not look the same for all products.

Products used for goods transport—shipping and trucking—may be most robust in Brogan’s view, as they are inextricably tied to the re-establishment of more normal global trade. Demand for passenger transport fuels is more sentiment-driven and there is a chance that it comes back at lower levels, he suggests. But the most vulnerable element could be air travel demand, where an immediate bounce-back looks particularly uncertain. “So, you have different products where demand will likely recover at different rates,” says Brogan, “but then you also have the complication that we will have a lot of product in store, some of it in quite unusual places far from market. It is going to be quite bumpy on the way out, and we may get some quite strange swings in product differentials because we end up with supply/storage/demand mismatches on individual products.”

David Phillips, head of equity research for developed Europe at HSBC, shares the view that, in the short-term, recovery in air travel demand looks weakest and shipping is likely to be robust. But he has a slightly different take on personal transport. “It may bounce back quite nicely,” he surmises. “Once people are released from their quarantine, we may see a reasonable amount of pent-up personal activity.”

“Once people are released from quarantine, we may see a reasonable amount of pent-up personal activity” Phillips, HSBC

But personal and lifestyle changes in response to the pandemic could also have potential longer-term consequences for future oil demand. “From a personal viewpoint, I cannot help thinking that some aspects of air travel could be somewhat at risk,” says Phillips.

“Do you need to fly to another continent to meet your clients every other week, or would twice a year be sufficient? That could now be up for discussion, even if only on a cost basis, before we even get into the HSE and ESG angles,” he suggests.

And it is not just business air travel that could be upended. “Given how well we are all operating remotely, this may be a wake-up call in terms of more diverse work/life solutions and worker flexibility. And that has knock-on effects on a number of big trends, say the assumption of continued urban growth in certain countries.

“There are a number of flexible working models, and these could have an indirect impact on all of the big background trends that have been there for many years, and on which overall energy demand assumptions are built,” says Phillips.

However, we must be conscious that the reaction to lockdown is not uniform across the globe and be careful about potentially overstating how it may have changed the attitudes of both private individuals and companies.

“I think people in the US may have a more short-term, day-to-day view”, says Julie Mayo, US oil & gas practice leader at Norton Rose Fulbright . “But the longer work-from-home goes on, it will increase people’s comfort with the idea. And if companies see their workers can be productive from home, it may cause them to re-evaluate policies.

“But, speaking from a Texas perspective, we love our vehicles,” she cautions. “I certainly do not see Texans giving that up in favour of home working. That said, the Texas Railroad Commission’s forecast that demand will take a number of years to recover may build in some assumption on a material shift in how and where people work going forward.”

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