September 14, 2020 [Oil Price.com] – Rising levels of oil in floating storage, price cuts for Saudi crude, and a slowdown in Chinese imports: these were some of the factors that recently pressured oil prices. And the reason they pressured prices was that they all told the same story: demand is not improving as it should be. And this is fueling fears for long-term demand, too.
Would Big Oil’s bet on plastics pay off? Will jet fuel demand ever get back to pre-pandemic levels? Will demand for gasoline? The future of the oil industry hangs on the answers to these questions. The coronavirus pandemic wiped out millions of barrels in fuel demand as countries locked down to contain the spread of disease.
This demand is now returning as lockdowns ended, but it is not returning as quickly and as strongly as some may have wished, prompting bleak forecasts. Yet U.S. gasoline inventories have registered some quite substantial drawdowns over the past three months—driving season is the most active demand period for gasoline—and Chinese refiners have been importing oil like there is no tomorrow. The picture is not that bleak. It will just take longer for fuel demand to recover.
Last month, in their regular monthly forecasts, the three biggest energy authorities—the Energy Information Administration, the International Energy Agency, and OPEC—appeared to agree that it would take at least until 2022 for oil demand to recover to pre-crisis levels. Some analysts argue that demand would never return to pre-crisis levels, and they may have a point, especially if vaccine development takes more than a few months—which it usually does—and the world begins settling into the new normal of much fewer flights, less travel overall, and less consumption.
So, where is future oil demand going to come from? The short answer is, the same place it has been coming from until now. There will simply be a few million barrels daily less of it, for a while, at least. Oil is going nowhere, and the economies battered by the coronavirus will sooner or later recover. When they do, they will need more oil, and yes, this includes Europe, which has firmly stepped on the green path of renewable energy and electric cars. Even in Europe, the bulk of car sales are vehicles with internal combustion engines.
Transport fuels are one huge market for crude oil, and this market, however bleak the current outlook, is not going away. Nothing short of a mandatory switch to EVs can destroy this market, and even the most progressive of governments have so far stopped short of mandating such a switch. So even though right now, fuel stocks are growing because more gasoline and distillates are being produced than are being used, in the future the market will rebalance. People will either get used to the new normal and refiners will adjust their output, or a vaccine will be made available and we will return to our old ways.
Even jet fuel demand is not a kist cause. Air travel has been perhaps the hardest hit segment of the transport industry amid the pandemic, but the outlook is for growth. A recent report on air travel subscriptions forecasts that the global market will grow at a compound annual growth rate of 3.4 percent by 2027. It may not be a double-digit boom, but it is stable growth, even if now almost all airlines are struggling, with some failing to survive the current downturn.
Plastics and petrochemicals are another potential growth area. In fact, it is an area that the oil industry has been targeting as a main source of revenue in the future. A recent report by the Carbon Tracker questioned the wisdom of this strategy, saying that plastics demand is on the decline, which could leave oil and gas assets worth $400 billion stranded. Carbon Tracker’s argument is that Big Oil expects strong growth in the demand for plastics, but it is not coming because of the green pivot of governments and initiatives aimed at tackling plastic waste.
Whether this scenario will truly play out remains doubtful. There have been many attempts at coming up with cost-effective alternatives to plastics, for example. Some of these have been successful and others less so, but the fact remains that the world consumes tons of plastic despite the alternatives. Chances are until they remain the cheapest option—from an end-consumer’s perspective if not from a climate-preserving one—plastics will have a market, and not a small one.
Oil and gas—especially gas—for power generation are also not going anywhere despite the green push. Some day the world may be powered by renewable energy sources exclusively, but this day is far into the future if it ever comes. For the observable future, we will be relying on fossil fuels.
The oil industry is not a happy place right now. It may well continue to be an unhappy place for some time. Nevertheless, the world is still reliant on what it produces, whether we like it or not. The industry will undoubtedly suffer losses in both revenues and demand, but its primary demand sources will continue to be there even in 2050 when many a government’s net-zero plans are set for completion.
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