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Abstract
A second wave of the coronavirus pandemic is tearing its way through Europe and there is no question whether or not the rest of the world will eventually follow. The surge in coronavirus cases in many major developed oil-consuming economies has rekindled fears that oil demand recovery is again off track, and market balancing is still further away. Luckily, those fears are misplaced as a second wave of shutdowns may not take as large of a dent out of global demand as individuals have begun to resume their day to day lives. Therefore, global oil demand recovery will not be derailed as fear of the virus is likely not going to keep people locked up anymore.
Key Points
- Fears about a second wave of government mandated shutdowns is causing unrest in crude markets. It is likely that new shutdown orders will not have the same compliance as before, so an equivalent drop in demand from March/April is probably unfounded.
- Economies have seen major impacts to their GDPs from the shutdowns, but as re-openings have occurred, are starting to bounce back. Canada saw a 37% GDP decrease through Q2 2020, but has recovered by 4.8%, 6.5%, and 3% in May, June, and July, respectively. However, even without a second shutdown, GDP for Canada, U.K., and the U.S. are still expected to be 4% to 6% weaker year-over-year than 2019.
- Interstate mandatory quarantines and localized lockdowns appear to be the most likely method the government will respond to a second wave of infections. New York has already implemented restrictions for neighborhoods with positivity rates higher than 3%.
- In the U.S. in 2019, the transportation sector accounted for 68% of petroleum consumption. Lockdowns earlier in the year were a major cause for a reduction in this demand. It is estimated that U.S. road travel is back to pre-pandemic levels, with some areas of the nation reporting higher interstate traffic than 2019.
- If a second wave of shutdown orders are implemented, it is unlikely crude demand destruction will equal the levels seen earlier this year. This would be attributed to more knowledge about the virus now available, smaller area impacts due to localized shutdowns, the possibility of additional non-compliance, and more overall road travel.
- Fear of the virus is likely not going to keep people locked up anymore. This probable shift in much of society’s attitude will be the driving factor to continue supporting crude oil demand from falling to levels seen during the initial wave of shutdowns.
Introduction
There’s no doubt that Europe is seeing a second wave of coronavirus infections and there is no question whether or not the rest of the world will eventually follow. If you have been following news headlines recently, there have been many titles along the lines of “Oil Prices Fall As Concerns About Second Wave Weigh On Markets” or “Second Wave Of COVID-19 Threatens To Shut Down Major Economies”. If a second wave of shutdowns were to strike the global market, what would that do to future demand? The surge in coronavirus cases in many major developed oil-consuming economies has rekindled fears that oil demand recovery is again off track, and market balancing is still further away [1]. Luckily, those fears are misplaced as a second wave of shutdowns may not take as large of a dent out of global demand as individuals have begun to resume their day to day lives.
Second Wave
The last six months have been stressful. There is stress from worrying about catching a potentially deadly virus, seeing loved ones catch it, trying to work from home, and sending kids back to school. Now the stress of a second wave is upon the world. While no one wants to see a repeat of the COVID-driven economic shutdown, with the economy reopening and no vaccine yet available, the possibility can’t be ignored. Economies worldwide can ill-afford another shutdown as many have mirrored the effects seen on Canada’s GDP that dropped 38.7% year over year in Q2 2020 but has since rebounded strongly [2]. The Canadian economy grew by 4.8% in May, 6.5% in June, and an additional 3% in July. Yet, a continued recovery assumes that any future wave of the pandemic requires “a lighter containment touch” than was necessary to flatten the first wave [2].
While the increase in cases may partly be explained by improved testing; the virus is spreading more among younger people who tend to have less severe symptoms, while seniors and others at risk are taking greater precautions. “For these reasons, we remain confident that a second generalized economic lockdown is unlikely,” stated National Bank Financial, Inc. who has been assessing COVID cases in North America and Europe [2]. What they and many economic and political leaders alike have suggested is a strategy to address a second wave of COVID-19 control that focuses on limiting victims without crimping the economy. Even without a second shutdown, economies aren’t expected to return to pre-pandemic levels of output this year. The GDP gap between Q4 of 2020 and Q4 of 2019 could be 4% to 6% for Canada, as well as for the U.S. and U.K., RBC Economics said in a macroeconomic outlook report [2]. Therefore new containment strategies are focusing on boosting the economy, but what will it mean for global oil demand? In order to understand this, it is important to look into travel restrictions and lockdown orders.
Travel Restrictions
Following the coronavirus pandemic and heightened by a surging second wave, countries worldwide continue to restrict entry and most travel remains discouraged. Acting Department of Homeland Security Secretary Chad Wolf wrote on Twitter: “to continue to limit the spread of COVID, the US, Mexico, & Canada will extend the restrictions on non-essential travel through Nov 21. We are working closely with Mexico & Canada to identify safe criteria to ease the restrictions in the future & support our border communities” [3]. The move is a continuation of measures that were originally implemented on March 21, which have been extended every month since. The agreement suspended all “non-essential” travel between the countries, including both tourism and recreational trips, but essential commerce and trade remain unaffected under the deal [3]. Although less restrictive than entry into North America, the European Union member states generally only allow entry for citizens or residents of other EU countries and the Schengen Area. Anyone without residency or citizenship in an EU state or the Schengen Area wishing to enter from a third country must have a valid justification [4]. While most of the world continues to partially restrict travel from other countries, some South American, African and Asian countries have total travel bans as seen in Figure 1 [5].
Beyond the global travel restrictions, information on the pandemic is constantly fluctuating in the United States and the 50 states are having to adapt rapidly to new rules and regulations. In fact, there are now 17 states (and Washington D.C.) that have travel restrictions on other states with New York leading the charge [6]. While many of these states require self-isolation for a two week period from COVID “hotspots”, a majority of U.S. states are now on New York’s COVID travel restriction list according to Governor Cuomo. People traveling to New York from 43 states and territories now meet the criteria to quarantine for two weeks upon arrival [7]. While the practice has not eliminated travel into the state, it surely has slowed the influx. In addition to discouraging travel, as opposed to banning travel or entire country lockdowns, an increasingly popular practice is localized lockdowns.
Localized Lockdowns
Around the world, policymakers have implemented localized lockdowns in small geographic areas to prevent the spread of the disease. As governments ease restrictions, localized lockdowns are becoming a relevant policy option in cases of resurgence, as they can in principle, reduce social and economic costs compared to larger-scale COVID suppression strategies [8]. Instead of having entire states or countries on lockdown, local governments are only restricting certain “hotspots”. After entire nations were shut down during the first surge of the coronavirus earlier this year, some countries and U.S. states are trying more targeted measures as cases rise again around the world, especially in Europe and the Americas [9]. New lockdown orders for cities in the United States zeros in on individual neighborhoods, closing schools and businesses in hot spots measuring just a couple of square miles [9]. In New York, all neighborhoods that had positivity rates in recent days of more than 3% in contrast to the city’s overall rate of about 1.5% have been put back in various forms of lockdown [10]. Spanish officials limited travel to and from some parts of Madrid before restrictions were widened throughout the capital and some suburbs, while Italian authorities have sometimes quarantined spots as small as a single building [9].
The concept of containing hot spots isn’t new, but it’s being tested under new pressures as authorities try to avoid a dreaded resurgence of illness and deaths. This time it is met with more resistance from economies weakened by earlier lockdowns, populations angered at the idea of renewed restrictions, and some communities complaining of unequal treatment. But the idea is strategic. It allows for the continued mobilization of substantial resources to where they are needed most while ensuring greater mobility for the majority of individuals. “As a general principle, the targeting of measures to specific groups or geographical areas is preferable to one-size-fits-all measures, because they allow us to minimize the damage that social distancing inevitably imposes on society and the economy,” said Flavio Toxvaerd, who specializes in economic epidemiology at the University of Cambridge [9]. Localized lockdowns will allow individuals more freedom to move about in a safe manner while ensuring the spread of the virus is contained. On the flip side, countries including Israel and the Czech Republic have reinstated nationwide closures while many other governments hope smaller-scale shutdowns can work in conjunction with testing, contact tracing, and other initiatives they’ve now built up.
Demand Destruction And Gasoline Consumption
Luckily, global demand is already trending towards pre-pandemic levels in many big hitting areas of global consumption – petrochemicals, construction materials, freight transport, and, most notably, personal transport. While the world is still a few million barrels of global demand shy from pre-pandemic levels, demand is returning with transportation leading the charge. Unfortunately, oil prices have been dragged down by concerns of supply increases amid stalled demand recovery. This stems from many countries, especially in Europe, re-imposing some of the restrictions to curb the spread of the coronavirus as many major economies including the UK, Germany, France, and Italy battle a second wave [1]. Events that should have pushed oil prices higher like domestic crude oil stockpile draws and hurricane outages in the U.S. Gulf of Mexico were recently overshadowed by demand fears coming from a second wave. These fears are mainly from agencies blaming the delay in crude oil demand recovery on transport fuels, noting that “the aviation and road transport sectors, both essential components of oil consumption, struggled during the pandemic” [12]. These concerns do not justify the current level of low oil prices.
Since 68% of U.S. petroleum consumption resides in the transportation sector, it is no wonder the precipitous drop in this consumption caused the biggest drop in global crude oil demand during the peak of the pandemic [13]. With economies opening back up, adults returning to work, kids returning to school, and families fearing travel via airplanes; road traffic has resumed around the world. In fact, Bank of America analysts announced road traffic has nearly recovered from pre-pandemic levels and expects global oil demand from road use to go positive year-over-year within the next few months [14]. Even with rising levels of cases in places like Nebraska, which saw one of the highest new case counts per day in early October, are seeing more traffic on their highways than ever before. Traffic on the interstate system west of Lincoln and through Omaha, which fell 44% on the year in early April, was up 8%, and rural highways were up 5% from their historic peaks [15]. Texas, which has become a recent COVID hotspot, and Minnesota, which has recently locked down again, are noticing similar trends. Cities like Austin saw road traffic topping 80% of last year’s average at the end of September and the Twin Cities reported a drop of only 15% road traffic “and falling daily” at the end of October [16,17]. These statistics indicate that the 45% of global oil demand that goes into creating gasoline has returned to pre-pandemic levels, and individuals appear to still be driving regardless of a second wave.
This is not a discussion on whether or not demand will decrease during the second wave, simply a statement that based on the data and observed societal behavior, it may not be as bad as the first round. It is fair to anticipate that fewer people will heed the lockdown orders and more localized shutdowns will not cause as large of an impact. When global economies shut down and society sheltered in place, global demand destruction nearly wiped out the oil and gas industry. As demand outpaces supply for the foreseeable future, a possible relatively reduced impact to demand by a second wave as compared to the initial wave could be largely unnoticeable. Road traffic, that controls nearly half of global oil demand, is already back to normal (and above normal in some pockets). Society has been put through the ringer and armed with more information is well equipped to tackle the ensuing second wave.
Conclusion
Within the first 90 days of 2020, collectively everyone’s plans changed. Flights were canceled, events and parties were postponed, and for the foreseeable future, life as we knew it was put on hold. The stress of a second wave may be overwhelming, but for some people it is more than overwhelming. It means a continued fight for economic survival. With a resurgence of the global pandemic, people are starting to fight back. Fear of the virus seems to have taken a backseat to fear of individuals’ livelihoods. Is this necessarily the correct course of action? Possibly not. But it does make sense. Parents want their children to return to school to develop the social skills needed for socialization in society, to boost their immune systems, and so they can return to work to make a living for their families. Kids want to return to school to see their friends and be able to go to the park without having to wear “silly masks”. Young adults are craving social interactions that makes living that part of your life so exciting. People are scared of the virus but have begun to recognize social and economic interactions are also important.
So what does this mean? Fear of the virus is likely not going to keep people locked up anymore. They will still adhere to limits on social interactions, large gatherings, and things society deems unsafe because while they might be frustrated, most people attempt to be logical. They will continue to drive to the grocery store, order items off the internet, and have zoom calls with friends and family. They might also drive to the next town over to have a picnic with a loved one, drive to the beach or mountains for a socially distanced event, or even take a road trip for the sake of adventure. One thing is for sure, society will continue to be mobile. If lockdowns are not forced, individuals will attempt to continue to live life in this new normal as similar as they can to “pre-pandemic life”. As a result, global economies will most likely not be completely derailed and global oil demand probably won’t fall off a cliff. The second wave will bring difficulties and hiccups, but it will not be an identical repeat of the initial wave. In the wise words of Friedrich Nietzsche (a German philosopher, essayist, and cultural critic), “there will always be rocks in the road ahead of us. They will be stumbling blocks or stepping stones; it all depends on how you use them” [19]. It is time to face the second wave head-on, roll with the punches, and keep living life.
References
[4] https://www.dw.com/en/european-travel-restrictions-where-can-non-eu-travelers-enter/a-55221911
[5] https://www.iatatravelcentre.com/world.php
[6] https://www.mercurynews.com/2020/10/12/u-s-covid-19-travel-restrictions-state-by-state/
[8] https://www.medrxiv.org/content/10.1101/2020.08.25.20182071v2
[9] https://www.fox5ny.com/news/skepticism-worldwide-over-localized-lockdowns-to-stop-virus-spread
[10] https://www.nytimes.com/2020/10/04/nyregion/nyc-covid-shutdown-zip-codes.html
[13] https://www.eia.gov/energyexplained/oil-and-petroleum-products/use-of-oil.php#
[14] https://www.cnn.com/2020/09/08/investing/oil-prices-drop-saudi-arabia/index.html
[17] https://www.fox9.com/news/twin-cities-metro-traffic-still-down-15-percent-from-normal-may-remain-low
[18] https://energynow.com/2020/10/iea-says-oil-producers-may-struggle-to-gauge-demand-amid-second-wave/
[19] https://www.goodreads.com/quotes/280836-there-will-always-be-rocks-in-the-road-ahead-of