Oil & Gas Innovation Summer 2020 Digital | Page 40
EXPLORATION & PRODUCTION
Rystad: Oil Demand in 2020 Could
Lose Another 2.5 Million BPD
As the number of confirmed new Covid-19 cases surges to new global highs of beyond 200,000 per day,
a second wave of the pandemic is increasingly apparent in several countries – most notably in the United
States. Modelling the effect of a wider ‘second wave’ scenario, Rystad Energy finds that global oil demand
in 2020 could be knocked down to 86.5 million bpd, compared to our current base-case estimate of 89
million bpd.
In the second wave scenario, we don’t expect
the oil demand impact to be as strong as was
seen in the first outbreak, as restrictive measures
will be limited to particular regions and sectors.
We would expect these “smart lockdowns” to
lower the negative demand impact, so as not to
repeat the absolute low of 73.7 million bpd in
April. The maximum negative demand impact
in April 2020 was -26 million bpd, and the peak
month in the second wave could come close to
this at -18 million bpd, compared to the levels
projected prior to the pandemic. We will be
revisiting and updating these assumptions as
data becomes available.
North America (notably the lower US states),
the Middle East and Southeast Asia will be hit
relatively harder, Rystad Energy’s modelling
shows.
The rise of Covid-19 cases in the US is of
particular concern for the oil market given
the country’s high oil consumption under
normal circumstances, as this second wave
could paralyze road fuel demand. In China,
the authorities’ response to the recent case
resurgence in Beijing shows that re-imposing
radical lockdown measures is still a viable
option.
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“Covid-19 will also re-emerge in other
regions in our ‘second wave’ scenario
when the flu season starts in the northern
hemisphere in September and October. In
general, however, new waves of lockdowns
in regions such as Europe, South America
and Russia are expected to be more targeted
and less strict as health systems will be better
prepared than they were in April,” says Rystad
Energy’s senior oil market analyst Artyom
Tchen.
The demand for total oil products would not
be shared equally. Similar to the current status
quo, jet fuel and gasoline would be dealt the
most painful blows. But with more testing and
smarter lockdowns, a lot of this destruction
can be avoided – international borders and
travel can gradually reopen, with travel
restrictions on certain countries and regions
being imposed as new Covid hotspots appear.
More work from home (perhaps as much as
15% of the workforce in developed countries)
and less leisure travel will still pinch gasoline
demand. But as the economic risks mount,
we believe there will be creative solutions
for the healthy and not-at-risk parts of the
population to return to work and keep the
economy going.
The second wave scenario assumes a
prolonged recovery in the aviation sector due
to the downside risk of such a wave occurring
in the second half of 2020 and a second
negative demand impact spike in all regions
in the period from August to October 2020.
It is in essence an expansion of a downside
scenario that we previously modelled called a
“mitigation scenario”.
In the base-case that we use for our
projections, which we call the “effective
retainment scenario”, the spread of Covid-19
is plotted under the assumption that drastic
social distancing measures are initially
taken, which often means strict quarantines.
This scenario suppresses the virus so that
the number of cases drops to a low level.
Governments can then reopen society in a
controlled manner. Any new outbreak will be
again nipped in the bud with strict measures.
The difference between the two scenarios
by the end of the year shows a 5 million bpd
gap in December’s oil demand in the case of
a second Covid-19 wave. If the second wave
materializes, global oil demand will recover
much more slowly in 2021, landing between
4 million and 5 million bpd lower per month
than it would under our current base case,
thus dragging the pandemic’s market effect
further in time.
Demand is still very much in the driver’s seat
in setting the oil price agenda – an unexpected
dip of any magnitude will send the oil price
into a tailspin, whether swift and sharp, or
long and painful. At this point, OPEC+ is the
single supply tool to materially tighten the
market, but it faces massive storage buildups
as an adversary. And if there is a second
wave, that storage headache is going to greatly
worsen as implied builds again rise.
A significant oil price boost cannot occur
until the massive crude stock builds of recent
months are neutralized. This means that oil
prices will continue to carry considerable
downside risk as long as the supply and
demand dynamics are moving in opposing
trajectories. •