Post-COVID Global Oil Demand Update – EOY 2020 & the Impact of Second-Wave Shutdowns


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Abstract

Data shows world crude oil demand in the first quarter of 2020 declined by the largest volume in history – even exceeding declines during the 2009 financial crisis. As economic recovery resumes, the demand for hydrocarbons will begin to rise and will quickly surpass pre-pandemic levels. While the timeline has been delayed as a result of a second wave of lockdowns and sustained travel restrictions, people around the world will still need plastics for their daily activities, roads and vehicles to travel from place to place, goods and services created and shipped with hydrocarbons, and other consumables derived from crude oil. While initial recovery estimates by RARE PETRO, the IEA, and EIA have changed, hydrocarbon demand will still eventually recover to pre-pandemic levels for several reasons.  


Key Points

  • The global petroleum demand outlook has changed from initial estimates by RARE PETRO, the International Energy Administration (IEA), and Energy Information Administration (EIA) from their July 2020 projections. The major driver to these projections is the impact from a second wave of global COVID related shutdowns.

  • July 2020 estimates for demand recovery showed the fall from an all-time high of 101 MMBPD to 79 MMBPD, or 22%, during the trough of the pandemic in April. Recovery was expected to reach 98-99 MMBPD by the end of 2020, and surpass 2019 demand up to 102 MMBPD by the end of 2021.

  • Earlier predictions have since been proven inaccurate, as a second wave of shutdowns from increased COVID infections has extended the recovery timeline. With the transportation sector accounting for about 60% of global hydrocarbon demand, new restrictions on travel have made an impact on overall consumption. Additionally, a major policy shift in 14 countries and over 20 cities banning combustion engine sales has increased regulation relating to climate change.

  • New projections for hydrocarbon demand recovery have now been updated to reach about 101.5 MMBPD by the end of 2021. This is a 1.5-2.0 MMBPD decrease in demand originally anticipated by RP and the EIA in July. Increased petrochemical demand for the fabrication of plastics and protective masks and continued need for construction materials to build houses and maintain roads will continue to exist. As more people use personal vehicles for travel during the pandemic, the IEA also predicts gasoline and diesel demand to return to 97%-99% of 2019 levels in 2021.
  • Demand in developed countries like members of the Organisation for Economic Co-operation and Development (OECD) will likely reduce hydrocarbon consumption due to efficiencies, but overall global demand will continue to grow. It is estimated that by 2040, 140 MMBPD of daily demand will be needed. From this volume 47.9% will be allocated to developing countries, 27.6% will be used by the OECD nations, OPEC will need 8.8%, and other developed countries will utilize 15.7%.

Introduction

Nearly six months ago, the RP Team proposed global oil demand would be approaching 100 MMBPD by December 2020 and would return to pre-pandemic levels by Q4 2021. So how accurate were these lofty expectations?

The petroleum industry is at the heart of the global progress machine as hydrocarbons are the fuel for the global energy system. Unfortunately, the global pandemic upended all aspects of society and the oil and gas industry was no different. The coronavirus has caused massive global demand destruction for hydrocarbons, and recovery will occur at different rates throughout the various sectors of the economy. As economic recovery resumes, the demand for hydrocarbons will begin to rapidly rise and quickly surpass pre-pandemic levels. Oil and gas is used in almost every industry and creates countless products that ease the way of life. From gasoline to battery parts, modern society can not function without hydrocarbons. The fuel needed to run economies will continue to be essential as the world begins to reopen and usher in a new age, but the breakdown in consumption may start to change.


Global Demand Overview 

At the start of 2020 crude oil demand was at all time highs, topping out at about 101 million barrels per day [1]. This growth phenomena would have extended back to 2006 if not for the Great Recession, a period of general decline observed in national economies globally between December of 2007 through June of 2009 [2]. While the scale and timing of the recession varied from country to country, it had a worldwide impact. Global oil demand declined for several years during this period, and a similar trend is beginning to develop as the world exits the current crisis. Levels for crude oil demand in the first half of 2020 are down significantly from the 2019 end of year highs, and lagging demand leaves hope of a swift recovery off the table. 

Figure 1: Daily Global Crude Oil Demand from 2006-2020 in Millions of Barrels [1] 

In April during the peak of the coronavirus pandemic, global oil demand was down nearly 22% from its record highs. According to the June release of the U.S. Energy Information Administration’s Short Term Energy Outlook (STEO), global oil demand reached 101.86 MMBPD in December 2019, but by April 2020 that value had dropped to a mere 79.15 MMBPD [4]. The demand destruction was due to economies and societies worldwide completely shutting down to stop the spread of the virus. Travel restrictions, canceled events, and lockdown orders forced individuals to shelter in place for months causing global oil demand to plummet. 

Figure 2: Global Consumption of Liquid Fuels [3] 

Regardless of the global pandemic, many experts predict overall oil demand will rise into the foreseeable future until efficiency improvements in the transportation sector force an eventual plateau. The representation of this in Figure 2 highlights an analysis by oil and gas supermajor BP estimating global consumption of liquid fuels through 2040. While the timeline for a return to record high levels of oil demand remains uncertain, one fact is clear: current society was built by hydrocarbons. In order to maintain this progress, demand for oil and gas must continue to rise well into the future. 


July Predictions

The coronavirus has caused global demand destruction for hydrocarbon consumption, and recovery will occur at different rates throughout various sectors of the economy. Data shows world crude oil demand in the first quarter of 2020 declined by the largest volume in history – even exceeding declines during the 2009 financial crisis [9]. As economic recovery resumes, the demand for hydrocarbons will begin to rise and as predicted in July, will quickly surpass pre-pandemic levels. While the timeline has been delayed as a result of a second wave of lockdowns and sustained travel restrictions, the logic remains the same. People around the world will still need plastics for their daily activities, roads and vehicles to travel from place to place, goods and services created from and shipped with hydrocarbons, and other consumables derived from crude oil.  

Table 1 shows the RARE PETRO (RP), IEA, and EIA demand predictions through 2021 made in July 2020. RP estimated that global oil demand will surpass 2019 levels by the start of Q4 2021, meaning that in just one year global demand will surpass levels experienced before the coronavirus. The timeline for this prediction has since been altered in the latest projections as a second wave of infections has hindered demand recovery. In July, initial projections by the IEA and EIA initially predicted demand would not return until year-end 2021. Although the RARE PETRO Team still believes demand will return quicker than most analytics firms, there are multiple reasons why the demand recovery has been delayed.


Reasons Demand Is Lagging

Demand is certainly returning, but it is taking significantly longer than expected. The culprit? A second wave of lockdowns that has kept global societies sheltering in place much longer than anticipated six months ago. The lion’s share of global oil demand is used to fuel cars and trucks all over the world. More importantly, the global transportation sector alone currently accounts for upwards of 60% of global oil demand [3]. With borders shut down and individuals forced to stay home as a second wave of the global pandemic wreaks havoc, it is no surprise global demand is struggling to recover. While the second wave did not wipe out as much demand as the first wave, it has certainly slowed recovery. Global analytics agencies like the EIA, IEA and even supermajor oil and gas companies have made similar predictions to the RARE PETRO Team. The initial overall consensus estimated total energy demand would return to pre-crisis levels by year end 2021 or early 2022. Unfortunately those estimates have been adjusted, some significantly, like the International Energy Agency who has projected total energy demand will return to pre-crisis level by early 2023 [7]. 

Figure 3: World Petroleum Consumption Balance, December 2020 [5] 

In addition to lockdown orders shutting borders down and restricting travel on a global scale, another hindrance to demand quickly returning is the sudden shift away from combustion engines. More than 14 countries and over 20 cities around the world have proposed banning the sale of passenger vehicles, primarily cars and buses, powered by fossil fuels such as petrol, liquefied petroleum gas, and diesel at some point in the future [8]. While the movement began long before the pandemic, the current crisis has shed more light on the situation. The stark drop in energy demand due to the coronavirus pandemic will remove some 2.5 years’ worth of energy sector emissions between now and 2050, according to BloombergNEF’s latest New Energy Outlook 2020 [9]. These findings have added fuel to the race against climate change and have encouraged global societies to take action. For instance, California Governor Gavin Newsom signed an executive order banning all in-state sales of gasoline-fueled vehicles by 2035 to help meet the state’s zero-carbon goals and combat the climate change fueling this summer’s heat waves and wildfires back in September [10]. A month later, the New Jersey Department of Environmental Protection said the state will need to phase out the internal-combustion engine by 2035 to meet its climate goals proving the focus on removing petroleum from the energy mix [11]. Such actions have further delayed global petroleum demand recovery as the world recovers from the current crisis. 

Luckily, there is a light at the end of the tunnel with the release of a vaccine for the coronavirus. As COVID-19 vaccines roll out to limited groups of people across the United States, eligibility to receive shots following state vaccination plans may not be clear-cut while supplies remain limited, according to public health and policy experts. In Phase 1a of the vaccine rollout, health care workers and residents of long-term-care facilities are prioritized, easy groups to reach because they’re in distinct locations [6]. During the next phase, people 75 and older and front-line essential workers should be prioritized, according to recommendations from the CDC’s Advisory Committee on Immunization Practices. After that, Phase 1c will include people 65 to 74 and people 16 to 64 who have high-risk medical conditions, along with other essential workers [6]. Federal officials with Operation Warp Speed hope that about 50 million people will have received their first of two shots of a COVID-19 vaccine by the end of January and Health and Human Services Secretary Alex Azar has said the government should have enough supply so that every American who wants a vaccine can get it by summer 2021 [6]. Does that mean life will go back to normal in the next six months? Certainly not. But it is a step in the right direction for demand recovery. 


Conclusion

The decade’s start has been quite the whirlwind. The year began bumpy with Australian wildfires, threats of war following military actions, and impeachment trials for the President of the United States. Then things really became crazy with the emergence of the pandemic shutting down societies and economies worldwide. As the world continues to recover, rebuild, and reopen, a new age will be ushered in – a post-pandemic normal. As this new normal begins to reveal itself, it brings with it global petroleum demand. The EIA estimates that the world consumed 95.6 million barrels of petroleum and liquid fuels each day in November, which is down 6.3 million bpd from November 2019 but up from the third-quarter 2020 average of 93.5 million bpd [5]. Furthermore, the EIA forecasts that global consumption of petroleum and liquid fuels will average 92.4 million bpd for all of 2020, which is down by 8.8 million bpd from 2019, before increasing by 5.8 million bpd in 2021 [5]. What does this mean? Global demand for oil and gas is returning, it is just taking significantly longer than originally anticipated. 

Table 2 shows the updated estimates for demand through 2021 and the change in anticipated consumption from the July 2020 estimates. Estimates show increased petrochemical demand for the fabrication of plastics and protective masks, continued need for construction materials to build houses and maintain roads, and neutral growth in personal transportation overall. While the transportation sector seems to be the main culprit for hindered demand recovery, the IEA expects demand for both gasoline and diesel to return to 97%-99% of 2019 levels in 2021 [4]. It appears that the decreases in air and bus travel will be more than offset by an increase in personal vehicle usage, regardless of new combustion engine mandates. In addition, increased freight transport highlighted by large jumps in trucking fuel consumption is also expected. Although the percentage weights have changed in the various segments before and after COVID, overall consumption volume will be larger. While these values are only estimates, they are based on research and data to create a representation of how domestic hydrocarbon consumption will likely look like for the foreseeable future. 

When predicting global oil demand, one must look at the big picture. It is easy to recognize that developed countries who represent 80% of world trade and investments, like members of the Organization for Economic Co-operation and Development (OECD), will slow their hydrocarbon consumption in the future from increased usage efficiencies [12]. The story for developing countries will be quite different. Of the predicted 140 million barrels of daily demand needed in the year 2040 as predicted by Statista, developing countries are expected to account for nearly 67 million barrels per day of demand (47.9%), OECD nations will account for a total of 38.7 million barrels daily (27.6%), and the 14-member Organization of Petroleum Exporting Countries (OPEC) is projected to demand 12.3 million barrels of oil per day (8.8%) [1]. The remaining 22 million barrels (15.7%) of global demand will be consumed by other developed countries. This data indicates that most of the demand growth will come from developing countries while the steady need for hydrocarbons will be maintained throughout the developed world before an eventual decline in OECD countries.

Oil and gas are used in almost every industry and create countless products which have an enormous impact on modern daily life. From gasoline to tupperware, the world can not function without hydrocarbons, and they will continue to play a significant role in the global energy system. Bottom line: once the world recovers from this pandemic a high demand for hydrocarbons will continue to build and fuel the human race. Progress may have temporarily slowed, but human resilience will manifest from these trying times to build a better post-COVID society. 


References

[1] https://www.statista.com/statistics/271823/daily-global-crude-oil-demand-since-2006/ 

[2] https://www.history.com/topics/21st-century/recession 

[3] https://www.bp.com/en/global/corporate/energy-economics/energy-outlook/demand-by-fuel/oil.html

[4] https://www.iea.org/topics/oil-market-report 

[5] https://www.eia.gov/outlooks/steo/report/global_oil.php 

[6] https://www.usatoday.com/story/news/health/2020/12/24/covid-vaccine-eligibility-how-when-americans-notified/4008128001/ 

[7] https://www.iea.org/reports/world-energy-outlook-2020/outlook-for-energy-demand#abstract  

[8] https://www.iea.org/reports/global-ev-outlook-2020 

[9] https://energyindustryreview.com/oil-gas/world-remaining-reliant-on-gas-and-petroleum-products-by-2050/ 

[10] https://www.greentechmedia.com/articles/read/california-to-ban-all-internal-combustion-engine-vehicles-by-2035  

[11] https://www.auto123.com/en/news/new-jersey-ban-gasoline-cars-2035/67518/ 

[12] https://www.thebalance.com/organization-economic-cooperation-development-3305871

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