A crude comeback in the offing

Updated May 10, 2020

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A view of Ras Tanura terminal — the largest oil export terminal in the world — is seen in this file photo.
A view of Ras Tanura terminal — the largest oil export terminal in the world — is seen in this file photo.

CRUDE demand is set to return. None can deny. The real issue is when and to what extent? All this would depend, to a great extent, upon the level of ultimate demand once things get back to the ‘new normal’ and the level of supply. The availability of storage space could also be another variable in the entire equation. The threat of another spike in pandemic cases would also continue to haunt the matrix. But the focus is on what would be the ‘new normal’ and would crude demand ever get back to pre-pandemic levels?

Things are beginning to open, slowly but surely. And this is a phenomenon encompassing almost the entire world — from North America to Europe and South Asia including Pakistan. Consequent to this, demand has begun to rise somewhat. This is happening at a point in time when global supplies are beginning to feel the pinch of the unprecedented, coordinated output cuts. This would help put a floor beneath the crude prices. Some analysts though have not yet, given up on the possibility of WTI going below zero, sometime soon. In the meantime, we are getting into a phase of volatility, as indicated by markets strengthening early Thursday and then sliding back.

To bring out one’s crystal ball and peep into the future is virtually impossible at this stage. Too many variables are at play. The shape of the post-pandemic ‘crude world’ is still in the process of being shaped. Yet outlines are beginning to emerge.

Until three months ago, the oil industry was looking at aviation and petrochemicals for continued growth in oil demand for another decade or two, writes Tsvetana Paraskova. The pandemic has altered everything. The aviation industry has been dealt a near-deadly blow, upending all plans for fleet utilisation for years to come.

The pandemic could speed up the arrival of peak oil demand, says Paraskova, indicating the expected growth in global jet fuel demand through 2040, now may not occur. Already, airlines are cutting operations dramatically and are not expected to resume normal operations any time soon. Rystad Energy sees jet fuel demand plunging by 33.6 per cent in 2020 – a fall of at least 2.4 million barrels per day from last year’s 7.2m bpd.

“We believe this industry will recover but it will take two to three years for travel to return to 2019 levels and it will be a few years beyond that, for the industry to return to long-term growth trends,” a Boeing executive was quoted as saying in the press.

But a few industry leaders are contending this too. Royal Dutch Shell Plc’s chief executive officer, Ben van Beurden suggests the oil demand may never recover fully. Citigroup analysts don’t see jet fuel consumption back at last year’s level, until well into 2022, and some insist they are at the optimistic end of the spectrum.

Emphasising a new post-Covid-19 world, Julian Lee writing for Bloomberg believes in the current scenario many would gladly give up the daily commute in favor of working from home more often. This would dent crude demand on a permanent footing. Lee emphasises after months of successful teleconferencing, those business trips that helped keep planes full of high-paying travellers may also come under more scrutiny. Life would be considerably different, post-pandemic.

The April Monthly Oil Report of the International Energy Agency (IEA) also admits the demand recovery in 2H20 will only be gradual; in December (2020), demand will still be down 2.7m bpd, year-on-year (y-o-y). The report also suggests that the refining throughput in 2020 is expected to fall 7.6m bpd y-o-y to 74.3m bpd on sharply reduced demand for fuels. Global refinery intake is also expected to plummet by 16m bpd y-o-y in 2Q20, with widespread run cuts and shutdowns throughout the world. And, although refinery runs are falling, product stocks are still expected to build by 6 million bpd, while refining activity will slowly recover in 2H20, once global markets begin moving into deficit. Too many ifs and buts, indeed.

The report concedes the output cuts announced by global crude producers, won’t rebalance the market immediately. ‘We forecast a significant year-on-year fall of 26m bpd in May. In June, the demand will still be 15m bpd lower than a year ago’.

“It is still too early to determine the longer-term impacts, but the energy industry that emerges from this crisis will be significantly different from the one that came before,” says good, old, friend, Fatih Birol, the IEA executive director.

And none can’t deny that.

Published in Dawn, May 10th, 2020