Hopes were high as the world entered a new year that 2021 was going to be the year that things went back to “normal,” but the first few months made those hopes seem like a far fetched idea. Improved economic activity and global mobility in the first quarter of 2021 was stalled by slow vaccine rollouts around the world and a stubborn third wave of lockdowns imposed throughout Europe. Luckily the second quarter has seen an explosion in global crude oil demand as vaccination campaigns have picked up the pace and travelers worldwide seem to have caught the summer travel bug. While the timeline to pre-crisis demand has been delayed, 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 which will continue to boost demand through 2021.
- Prior to the pandemic, crude demand was near 101 MMBPD and by April 2020 had dropped nearly 22% to 79 MMBPD. One year later as vaccines continue to roll-out globally, experts are predicting global oil demand to continue rising until efficiency improvements in the transportation sector force an eventual plateau.
- A previous prediction by the RP Media team in December 2020 estimated the 2021 average global demand would be 99 MMBPD, with the EIA estimating 98.2 MMBPD and the IEA estimating 97.0 MMBPD. Due to a second wave of lockdowns throughout the world, it is likely these predictions overestimated the average demand for the year.
- New crude demand projections from April 2021 were made by the EIA, IEA and RP. Demand for Q4 2021 is expected to be higher than December 2020 projections, but overall 2021 demand will likely still be lower. Three main reasons for this are the major push for green energy from the Biden Administration, a shift in pandemic-induced lifestyle changes leading to more employees working from home, and a slower than anticipated global vaccine rollout.
- According to a recent Harvard Business School survey, 61% of remote-workers say they would like a hybrid work schedule going forward. Only 18% from the survey noted they would prefer to go back to working in an office full time. If 1.5 to 2.0 MMBPD of demand destruction occurred during the pandemic from a reduction in commuting, hybrid work schedules for half of working adults could result in up to 0.5 MMBPD in crude demand that never returns to the road.
- While initial vaccine roll-out in the U.S. began slowly, as of April 1st over 171 million doses had been administered and 19.4% of the total U.S. population was fully vaccinated. As people continue to become fully vaccinated, their consumption of gasoline during the summer driving season will also likely rise. In March 2021 gasoline demand in the U.S. exceeded 2020 levels and over Easter weekend more than 1.58 million people passed through airports.
- The Institute for Supply Management (ISM) announced its index for national factory activity jumped to 64.7 which is the highest it has been since December 1983. This index indicates an expansion in manufacturing is occurring which will further utilize crude and energy products.
- Although initial projections on the timing for crude oil demand to return to pre-pandemic levels were overestimated, RP now predicts the 2021 average will be 98.0 MMBPD with the largest increases in Q4 2021. The EIA is estimating an average for 2021 of 97.7 MMBPD and the IEA is estimating 96.5 MMBPD. Due to slower than expected vaccine distribution and additional lockdowns, the new RP 2021 crude consumption estimate is a reduction of 2.5 MMBPD from the initial July 2020 projection.
Nine 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. We altered those projections in the final week of 2020 to reflect the second-wave of pandemic-induced lockdowns with an updated projection for global demand reaching 97.5 MMBPD by YE 2020 and 100.5 MMBPD by the end of 2021. Now that global vaccination rollouts are in full force and the world is prepared to enter the summer driving season, how accurate were these expectations and what does the remainder of the year look like for global oil demand?
The petroleum industry is at the heart of the global progress machine as hydrocarbons are the fuel for the world’s energy system. Unfortunately, the global pandemic upended all aspects of society and the oil and gas industry was no different. The coronavirus caused massive 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 . 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 . 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 has presented itself as the world exits the current crisis. Levels for crude oil demand in 2020 were down significantly from the 2019 end of year highs, but vaccine rollout efforts have given 2021 the momentum to help close the gap. Lagging demand has still left the hope of a swift recovery off the table.
In April 2020 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 . 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.
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.
RARE PETRO’s December 2020 Predictions
In the final weeks of 2020, the RP Media team noted that global oil demand was certainly returning, but it was taking significantly longer than expected. The culprit? A second wave of lockdowns that kept global societies sheltering in place much longer than anticipated six months prior. With borders shut down and individuals forced to stay home as a second wave of the global pandemic wreaked havoc, it is no surprise global demand is still struggling to recover. Much of this was due to the transportation sector alone accounting for upwards of 60% of global oil demand. Another hindrance to demand quickly returning is the sudden shift away from combustion engines. Late 2020 saw a massive push in the electric vehicle industry that continued to hinder any kind of future crude demand growth, but luckily there was a light at the end of the tunnel with a vaccine release for the coronavirus. Although it was understood life would not go back to “normal” for quite some time, it was certainly the glimmer of hope the global petroleum industry needed after nearly a year of weathering the storm.
Table 1 shows the RARE PETRO (RP), IEA, and EIA demand predictions through 2021 made in December 2020. RP initially estimated that global oil demand would surpass 2019 levels by the start of Q4 2021, meaning that in just one year, global demand would be above pre-coronavirus levels; but modified those projections in December to reflect a second wave of lockdowns. This update alters the latest projections due to a renewed focus on clean energy and some European countries instituting yet another round of lockdowns. In December, initial projections by the IEA and EIA predicted demand would not return to pre-pandemic levels in 2021, and although the RARE PETRO Team still believes demand will return quicker than most analytics firms, lagging global demand has again forced 2021 projections to change.
The Continued Lag In Demand
Updated projections for the EIA, IEA, and RP indicate higher Q4 2021 demand than predicted in December, but lower overall projections for 2021. How can this be? Well, global crude oil demand is a constant balancing act between a multitude of factors, and the scales have tipped towards consumption later than initially expected for three main reasons. The first reason is a renewed focus on clean, green energy supported by the moves of President Joe Biden. With a flurry of executive actions in his first few months as President, Joe Biden has set his Clean Energy Revolution into motion. The cornerstone of his Clean Energy plan: working with Congress to put the United States on an irreversible path for achieving economy-wide net-zero emissions no later than 2050, has trickled into the fossil fuel industry with a renewed ESG focus on creating green energy . Such actions have slowed crude oil demand projections as many analysts foresee the eventual energy transition happening sooner rather than later with Joe Biden steering the ship. The second factor has to do with pandemic-induced lifestyle changes. Leading that charge: employees working from home. According to a new Harvard Business School survey, more than a year after coronavirus shut down offices worldwide, most workers now say that they actually prefer the work from home grind and would like to maintain at least a hybrid schedule in the post-pandemic world. According to the survey, 61%, or more than half of workers, who have been at home since last March say they would like a hybrid work schedule where they go into the office only two or three days a week while another 27% want to work remotely full-time, and only 18% prefer to go back into the office full-time . Just three months into the pandemic, S&P Global Platts predicted between 1.0 to 1.5 million bpd of crude oil demand would be lost from people no longer commuting, with another 1.5 to 2 million bpd lost from a slowdown in business travel . If over half of working adults wish to continue working from home two days a week, that will be another half a million barrels per day of global demand wiped off the table thus hindering short term demand growth.
The final reason is quite broad but also very simple: the global pandemic is taking longer to deal with than initially anticipated. After the second wave of lockdowns crippled demand in late 2020, a future path seemed to be clear with vaccine rollouts seemingly on the horizon. The problem was, the vaccine rollout was far too slow, even in developed countries like the United States and the European Union. To begin the New Year, the European Commission began a coronavirus vaccination campaign to vaccinate 80 percent of people over the age of 80 . Now, three months into their campaign, only five EU countries have met the goal, and only a few of those reporting have vaccinated 80 percent of their health and social care workers. The World Health Organization criticized Europe’s sluggish vaccine rollout as “unacceptably slow” in a recent statement, pointing to the low rate of vaccinations with just 10% of Europeans receiving at least one dose of the COVID-19 vaccine and only 4% having been fully vaccinated, according to the WHO . Fears are now beginning to mount that have forced several European countries to extend or reintroduce lockdown measures as a third wave of the pandemic sweeps the continent fueled by new, more contagious variants.
For the United States, in the final weeks of December and the final month of President Donald Trump’s time in the White House, Federal officials with Operation Warp Speed announced about 50 million people would have received their first of two shots of a COVID-19 vaccine by the end of January. Health and Human Services Secretary Alex Azar has also said the government should have enough supply so that every American who wants a vaccine can get it by summer 2021 . As of February 1st, the United States had administered a mere 26.5 million vaccinations, half of what was expected during that time . These delays have extended the oil-crippling lifestyle the global pandemic has ushered into the world, but on the flip side of the coin there also lies hope.
Hope For The Future
While woefully missing the end of January goal of 50 million vaccinations, President Biden hoped to achieve 100 million vaccinations in his first 100 days. Initially this seemed out of the question, and remained a hindrance to short term crude demand growth. That is until the vaccination rollout picked up momentum, causing President Joe Biden to update his goal of 100 million vaccines administered during his first 100 days in office to 200 million vaccines. “We met our first goal on day 58,” said Biden. “I know it’s ambitious, twice our original goal, but no other country in the world has even come close” . His announcement came on March 25th when the United States was averaging 2.5 million vaccinations each and every day. But on April 1st, the United States hit a single day high of over 4 million daily vaccinations leading to a total of more than 171 million doses administered and fully vaccinating over 64.4 million people, or 19.4% of the total U.S. population .
Since the transportation sector alone accounts for upwards of 60% of global oil demand, it should be no surprise that as individuals gain the freedom to move about, this sector will tip the consumption scales towards a bright end to the year. In fact, U.S. gasoline demand exceeded 2020 levels for the first time in March 2021 . While demand still trails pre-pandemic levels, it is certainly a bullish sign leading into the summer driving season where gasoline demand is poised to skyrocket. Meanwhile, there appears to be a travel bug sweeping across the world. With jet fuel stocks draining worldwide and more commercial air travel in the U.S. than the past year, it certainly seems people are ready to see the world again as more than 1.58 million people passed through airports over Easter weekend . While the lack of air travel certainly decimated global petroleum demand at the peak of the pandemic with nearly all flights grounded, it is expected to be a key driver for the accelerated demand recovery going into the final months of 2021. In fact the demand change was so abrupt and unexpected that Delta Air Lines had to cancel more than 100 flights over the busy Easter weekend due to crew shortages as they didn’t anticipate the volume of passengers travelling . The cherry on top lies in the manufacturing sector which had its index race to a 37-year high in March. The Institute for Supply Management (ISM) announced its index of national factory activity jumped to a reading of 64.7 last month from 60.8 in February, already the highest level since December 1983 . A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy, and will provide an additional boost to global crude oil demand. Not surprisingly, as a result of the manufacturing boom, U.S. producers made 3.4% more cardboard in 2020 than the previous year due to higher demand for shipping boxes . While that might not sound like a lot, the increase is equivalent to 477 square miles of corrugated board, enough to cover all of New York City with room to spare.
While the timeline to return to pre-pandemic levels has been delayed as a result of the continued pandemic, 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 and shipped with hydrocarbons, and other consumables derived from crude oil. A renewed focus on clean green energy, hybrid work models, a slow vaccine rollout, and a subsequent third wave of lockdowns certainly hampered crude oil demand growth in the first quarter of 2021. Accelerated vaccine deployments worldwide, a stronger economy, manufacturing sector growth, and a desire to travel have ensured a more rapid return to pre-pandemic levels of demand. Last July, the initial consensus estimated total energy demand would return to pre-crisis levels by year end 2021 or early 2022 . Unfortunately those estimates were inaccurate, but analysts agree energy demand will return, and subsequently surpass, pre-crisis levels by year end 2022 or early 2023 [4,5].
The start of 2021 was slow in terms of global oil demand recovery, but has sped up significantly since the start of the second quarter. Hopes were high as the world entered a new year that 2021 was going to be the year that things went back to “normal,” but the first few months made those hopes seem like a far fetched idea. Just like Punxsutawney Phil seeing his shadow and extending winter six more weeks, the hope for a return to pre-pandemic life was delayed as well. Luckily, just as flowers started to bloom, global oil demand began to pick up steam. While the speed and depth of the recovery will be uneven both geographically and in terms of sectors and products, one thing is clear: the world is on the road to recovery. With a renewed focus on a green economy in developed areas of the world, chances are gasoline demand is unlikely to return to its 2019 trajectory anytime soon as efficiency gains and the shift to electric vehicles eclipse robust mobility growth in the developing world. Alternatively, a global travel bug has analysts projecting aviation fuels, the hardest hit by the crisis, to slowly return to 2019 levels by 2024, but the spread of online meetings could permanently alter business travel trends . If this is the case, what was the tipping point to cause demand to return and begin accelerating so quickly?
The global pandemic took longer than originally expected to handle, resulting in revisions of multiple estimates. Table 3 shows RP’s demand revisions over time as new information relating to the global market has become available. Most important to note is the fact that the 2021 average has been constantly adjusted downward due to slower than expected recovery for a 2.5 MMBPD correction between July 2020 and April 2021. For Q4 and December 2021, the overall demand is expected to recover much quicker than in the first part of the year as the Media Team predicted. The exciting growth moving forward is expected to come from emerging and developing economies, underpinned by rising populations and incomes. The developed world will continue to consume hydrocarbons until energy efficiencies create an eventual decline while additional consumption growth will occur in areas relying on cheaper sources of energy. Oil and gas is used in almost every industry and creates 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.