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Post-COVID Global Oil Demand Series – Part 2: Freight Transport

Post-COVID Global Oil Demand Series – Part 2: Freight Transport

Abstract

The coronavirus pandemic has ushered in a new age and as the world begins to adjust to the new normal, demand for commodities like oil and natural gas has and will continue to change. Due to lockdown orders and social distancing guidelines, many individuals altered their in person shopping habits to online ordering. As a result, the freight industry has been able to remain busy during the pandemic ensuring goods reach their final destination in a timely manner. This demand does not appear to be going away anytime soon. Part two of our four part series on post-COVID oil demand will investigate the change in global oil demand for fuel used in freight transportation.


Introduction 

A huge impact on travel, purchasing trends, and workforce behaviors was seen from the global pandemic shuttering economies in the first half of 2020. As consumer and business habits adjust, the post pandemic new normal will have impacts on many facets of life. This may bring about new issues and hurdles to overcome with the transportation of goods throughout the supply chain. What are conditions for workers in factories and packaging facilities? How will supply chains change to continue meeting demand for essential products? Are there enough redundancies in the supply chain to prevent distribution issues? What happens if there is another consumer run on household items? Can the economy handle a second wave of lockdowns? Organizations are still retooling their businesses to be prepared for these concerns. The question most relevant to the energy industry is: what will oil demand look like as the world transitions to a new normal? Throughout this global transition, the news team at RARE PETRO is releasing a four part series investigating the demand for oil and gas in a post-COVID society. This second installment will explore how demand for hydrocarbons used to fuel freight transport will likely change in the future.  

Freight Transport Definition and Uses 

Freight transport/shipping is the process of transporting commodities, goods, and cargo by land, sea, or air. More specifically, the transport of goods and cargo by truck, ship, or airplane [10]. Not surprisingly, fuel to power the vehicles carrying these items comes from the oil and gas industry. Transportation has enabled great movements of people and things to create a global transport network making the world smaller each day. Globalization has allowed for countries to increase trade with each other, and as nations import and export more goods there becomes a greater need for efficient, cost effective shipping of this freight. Countries have been expanding domestically and internationally to meet these needs through all three types of freight transport. While the onset of COVID-19 may have frozen some freight shipping between nations temporarily, it did not diminish the importance of maintaining supply chains to provide consumers with essential goods and services. Food in grocery stores, homebuilding supplies, toilet paper, cleaning products, protective masks, online shopping orders, and countless other items still need to be packaged and transported around the world to reach the end consumer. The recent increase in this demand will most likely continue to grow globally.

For the freight industry, the larger concern was the possibility of reduced purchasing by the working class and newly unemployed. Discretionary spending and industrial production are key drivers of higher aggregate freight transport, and experts initially expected those to lag, creating a potential depression in freight volumes into the summer. While industrial production did take a hit due to reduced essential activity, mankind was still able to prove the experts wrong. Due to lockdown orders and social distancing guidelines, many people shifted their in person shopping habits to online ordering. According to e-commerce security and fraud prevention vendor Signifyd Inc., e-commerce sales were 39% higher for the week of May 26-June 1, compared with its pre-pandemic benchmark week of Feb. 24-March 1 (and have averaged slightly above that value throughout the entirety of the pandemic) [6]. 

The globe is still buying essential supplies and with extra free time due to reduced work hours or eradicated commute times, many individuals have found themselves shopping online for goods they may not need. Reduced spending on travel and dining out has also increased spending in other areas like home-improvement, furniture, and groceries as seen in Figure 1 [12]. 

Figure 1: U.S. Retail Spending Changes from a Year Prior Ending the Week of June 6th [12]. 

Humans can be innately lazy and when safety is an added concern, many prefer to stay home and have all the necessary supplies shipped to their front door. The influx of online orders has kept the freight industry busy during the pandemic in an attempt to deliver both essential and non-essential items to customers around the world. 

Land Freight Transport Post-COVID Demand  

Shipment of goods and cargo by land, the most commonly used mode of freight transport, has been the sector of freight most affected by the novel coronavirus. Due to the fact that trucking is the largest contributor to freight shipping, carrying 63.3% of the freight transported, it is no surprise that trucking has made a significant rebound as lockdown orders have been lifted [4]. Relative to the 46% drop in national personal vehicle-miles traveled (VMT), freight movement fell a modest 13% during the pandemic, proving commercial trucking has remained resilient during COVID-19; and a key part of the country’s efforts to recover from the pandemic [9]. As seen in Figure 2 starting in Week 1 (March 14-20), the freight vehicle miles traveled quickly decreased, especially in the industrial southern gulf region.  

Figure 2: Truck Freight Miles Traveled During the Pandemic [9]. 

Throughout the country, long-haul trucks continue to make their trips at nearly the same amount preceding the crisis, but don’t have to contend with the congestion around urban areas that typically stifle productivity. This indicates that the depressed volume in commercial trucking (down 13%) was mainly a result of manufacturing and oil producing states not needing industrial goods throughout the pandemic as many were deemed non-essential. With manufacturing and oil states seeing the largest drops, led by Michigan (-37%), Kentucky (-20%) and Texas (-20%), it becomes clear that personal supply cargo (like shipments from Amazon and Walmart) have remained strong while industrial shipments have significantly dropped [4]. Therefore, as business begins to resume in the manufacturing and oil industries, freight volumes are expected to increase in the new post-pandemic world. When individuals feel more secure purchasing products online over physical stores, personal supply cargo levels will remain elevated. Industrial industries will rise to pre-pandemic levels in the ensuing months ensuring the necessity for industrial cargo freight well into the future. One result of the coronavirus will be sustained, elevated shipment levels of goods by land. The resilience of commercial trucking during the global pandemic highlights how vital commercial freight is to the world’s recovery from the pandemic. 

Air Freight Transport Post-COVID Demand

While global passenger airlines have all but shut down during the coronavirus pandemic, freight transported by air was still essential. Interestingly enough, more than 50% of airfreight flies in the cargo holds of passenger planes, and that number rises to about 80% for transatlantic lanes [2]. Since global passenger airlines are all but shut down, the price of airfreight has skyrocketed. Many assume since people are stuck in place and not flying, all air prices should be down with low demand. This is not the case. Demand may currently be low for passenger flights, but it isn’t for desperately needed items like personal protective equipment and medical supplies [2].  Unfortunately with many passenger fleets now grounded, airfreight capacity has been dramatically reduced. According to the April 3 Seabury global capacity report, global air cargo capacity has dropped 35% from last year as a result of the pandemic [2]. Therein lies the problem: the intensely limited capacity has caused air freight prices to skyrocket, particularly from mainland China [2]. 

Figure 3: Comparison of Air Freight Composition During the Pandemic [2]. 

What the world is currently experiencing in the air freight market is unprecedented. Pricing is breaking all records and falls well outside the past five year range. China to North America spot airfreight pricing is now north of $10 per kilogram, and full freighters are selling above $1 million per flight—and increasing every week [2]. For reference, before the pandemic, cheaper air freight averaged $3 per kilogram [11]. Looking at China to Europe air freight rates, the news is not much better having seemingly tripled in the past month. As a result of soaring air freight prices, many vendors have opted to ship their cargo via sea. While the process takes much longer, it may be uneconomic for some goods to reach their desired destinations when air shipping rates have tripled.  

For personal protective equipment (PPE), paying more for airfreight is easily justified. The value of masks, ventilators, and other medical supplies is off the charts, and time is of the essence. PPE buyers are understandably willing to pay any price to receive life-saving products fast. This may be one of the only goods where surging air freight prices are justified. If the products can wait, sea freight may be the most cost effective option. With passenger airlines resuming many routes, even with reduced route options, times, and 2/3 passenger capacity, the available cargo space for freight will recover. As more people become comfortable with air travel and original routes resume, prices will eventually come back into balance and availability for air freight will return to pre-pandemic levels in the future. 

Sea Freight Transport Post-COVID Demand  

Another sector within freight transport hard hit by the global pandemic is the shipment of goods and cargo by sea. As almost 80% of trade is carried by sea, it is evident that disruptions to sea transport can damage trade flows and disrupt supply chains, especially when pandemic containment policies directly affect these supply chains [3]. Many key ports have imposed restrictions on vessels and crew, including prohibitions that have stopped crew changes. Satellite data for ships show that sailings to destinations with crew-change restrictions were down by almost 20% for container ships compared to previous years [3]. Besides a steep contraction in demand due to limited overseas trade, the industry is also faced with regulatory constraints disrupting its operations in almost all ports. The detrimental effects of local disruptions are multiplied as they spread through the network of interconnected shipping lines [3].

Figure 4: Weekly Departing Ships from Norwegian Ports During the Pandemic [3]. 

As a result of falling demand, within just a few weeks, carriers cancelled in excess of 100 sailings, equaling 45% of the capacity between Europe and Asia and the transpacific region at the start of the pandemic [5]. Unfortunately, the outbreak came at a time when shipping companies are used to lower demand due to the Chinese New Year and had already planned for this. Shipping companies did not plan for a ban on all non-essential travel, a largely reduced workforce, and the closure of production and shipbuilding facilities that exaggerating the problem. Luckily as lockdown orders have begun to ease, demand in the shipping industry is rapidly picking up pace. As seasonal demand for freight cargo begins to pick up, demand has been further boosted as a result of foregone airfreight due to soaring prices and a backlog of countless orders delayed three months by the pandemic. Although sea freight was hard hit by the pandemic, new cargo opportunities have presented themselves. Demand is expected to grow in the ensuing months and remain elevated into the foreseeable future. 

Conclusion 

The coronavirus pandemic has ushered in a new age, and as the world begins to adjust to the new normal demand for commodities like oil and natural gas will also begin to change. Summer vacations may be eliminated and families may have to enjoy a staycation. Enjoying a hot dog at a baseball game might not happen for another year, but at least one can be cooked in the backyard. The need for freight transportation to supply goods to people all over the world will continue to grow on an aggregate as well as a per capita basis regardless of implications from the pandemic. Whether by truck, airplane, or ship, one of the highest consuming areas of oil demand is fuel for freight transport. Although it was temporarily stunted during the pandemic, future consumption will rise to new highs as the world escorts in this new age. 

Figure 5: E-Commerce Shipments in 2020 Compared to 2019 [6]. 

E-commerce shipments rose over 40% during the pandemic as customers were unable to obtain goods in person from stores around the world. Now that many stores are opening back up, online orders have hardly dipped. The result is compounded demand growth ensuring the need for commercial trucking will not stop, and demand will continue to grow well into the future regardless of social distancing or lockdowns. 

Due to reduced air freight capacity and surging freight costs, air freight levels took a brutal blow during the pandemic as only essential items like medical supplies and PPE were being shipped. If public concern for health and safety remains high, PPE will continue to command the lion’s share of airfreight capacity until passenger flights pick back up and increased cargo space reduces soaring prices. Once it becomes economic to once again ship goods by air, fuel demand for air freight will return to pre-pandemic levels. 

All the foregone air freight created an immense backlog of orders that will propel other areas of the shipping industry to new heights. It was hard hit due to regulations attempting to contain the virus, but as restrictions ease, demand is quickly picking up. Until air travel allows for economic shipping at a high volume, new cargo opportunities have presented themselves for shipping vessels. This demand is expected to grow in the ensuing months and remain elevated into the foreseeable future. 

While the world adjusts to daily life in a post-COVID society, the tools and materials needed to ensure a properly functioning economy and the modes of transportation needed to supply such goods will continue to be a necessity. Table 1 shows the types of freight transport discussed, an estimate for demand change during the pandemic, and projected demand change into the future. The projections are based on logical assumptions for changes in society causing an increase or decrease in supply needs. The fuel needed to send goods around the world are created from oil and natural gas, and as a result overall aggregate demand for industrial freight transport will continue to grow on a global scale into the future. Life may change after the pandemic, but the energy used to transport products between people and nations will only continue to expand. 

References 

[1] https://www.forbes.com/sites/timothypapandreou/2020/03/27/is-the-coronavirus-the-transportation-industrys-opportunity/#55d8c8d752b7 

[2] https://www.flexport.com/blog/a-perfect-storm-how-the-impact-of-covid-19-has-driven-airfreight-to-historic/ 

[3] https://voxeu.org/article/covid-19-restrictions-hit-sea-transportation 

[4] https://www.dat.com/industry-trends/covid-19

[5] https://hillebrand.com/media/publication/covid-19-impact-shipping-industry

[6] https://www.digitalcommerce360.com/2020/04/27/ecommerce-shipments-increase-47-order-delays-spike-as-coronavirus-continues/

[7] https://www.iea.org/reports/oil-2020 

[8] https://www.eia.gov/energyexplained/oil-and-petroleum-products/use-of-oil.php 

[9] https://inrix.com/covid-19-transportation-trends/

[10] https://www.freightquote.com/define/what-is-freight-shipping/

[11] https://www.freightos.com/shipping-routes/shipping-from-china-to-the-united-states/#airsea

[12] https://www.wsj.com/articles/boats-pools-and-home-furnishings-how-the-lockdown-transformed-our-spending-habits-11592323923 

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1 Comment

  • Reply You’re Hot Then You’re Cold… – RARE PETRO June 29, 2020 at 11:45 am

    […] Part two of our four part series on post-COVID oil demand was published this past Wednesday. Be sure to check out: Post-COVID Global Oil Demand Series – Part 2: Freight Transport (Link) […]

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