Crude demand on ‘treacherous’ path to recovery due to transport, remote working - IEA

Author: Jonathan Lopez


LONDON (ICIS)--The recovery in crude oil demand is on a “treacherous” path as a resurgent coronavirus pandemic in Europe and India, among other places, keeps transport in the doldrums, the International Energy Agency (IEA) said on Tuesday.

With infections rising in Europe again, working remotely remains commonplace. This has resulted in a sharp reduction in demand for energy and transport, with the aviation sector taking the largest hit as travel has fallen dramatically this year.

The IEA’s Oil Market Report on Tuesday reduced its estimate for crude oil demand in the second half of 2020 by 400,000 bbl/day, and forecast that average demand for 2020 will be 91.7m bbl/day - a level not seen since 2013.

Compared with 2019, crude oil demand will be 8.4m bbl/day lower.

OPEC reduced its own estimates on Monday due to the slow recovery in the transport sector; the cartel expects average demand in 2020 to stand at 90.2m bbl/day.

“Global oil demand has accelerated rapidly since its low point in April. However, the path ahead is treacherous amid surging Covid-19 cases in many parts of the world,” said IEA.

“Consumption remains around 10.7m bbl/day below 2019 levels due to the impact of virus containment measures on transport demand, the uptake of teleworking and the economic crisis unleashed by the virus.”

With a growing risk of a resurgence of the pandemic, there are fears that economic activity will take another hit said the IEA, adding that aviation may not return to pre-pandemic levels “even next year”.

The hit to aviation caused by the pandemic has been pronounced. Demand for jet fuel and kerosene was still 4.7m bbl/day lower in August, year on year.

From April, when a large part of the world’s population was under some sort of lockdown measure, to June, when most economic activity had resumed, demand for jet fuel and kerosene has risen by only 620,000 bbl/day.

“Despite the return of some flights, border closures, quarantine measures, the cancellation or deferrals of some events and the fear of infection continue to weigh heavily on the industry,” said the IEA.

India, after enforcing a lockdown in April to contain the virus, is back in the spotlight after cases rose exponentially. In August, the country’s crude oil demand fell at its fastest pace since April.

At the same time, Chinese crude buying has slowed sharply for September and October deliveries, “leaving unsold barrels piling up” and reversing the trend started in April when China provided the main support for crude demand.

Demand for petrochemical fuels such as liquified petroleum gas (LPG), ethane, and naphtha was practically unchanged year on year during August, according to IEA data.

“European naphtha cracks collapsed in August, pressured by weak gasoline blending margins and highly competitive LPG prices for steam crackers,” said the IEA.

“However, the surge in gasoline cracks improved its blending values, and naphtha rebounded by early September. In Singapore, naphtha cracks flipped back into negative territory, pressured by competitive LPG and condensate economics in the petrochemical sector as well as weak gasoline blending economics.”

For 2020, demand for LPG, ethane and naphtha is expected to fall minimally, compared with 2019 on the back of “resilient petrochemical feedstock demand” and residential use of LPG.

The IEA expects demand for fuel oil, which includes marine bunker as well as power generation and industrial uses, to fall by “only” 400,000 bbl/day in 2020, around 6% less than in 2019.

Uncertainty caused by the first global pandemic of the hydrocarbon age makes forecasting crude oil demand “difficult, to say the least”, said the IEA.

In the past few days, some European countries have announced greater restrictions on social gatherings, while many workers remain home-based as companies have deferred a full return to offices to the beginning of 2021.

The IEA cited a survey conducted by The Economist, a UK financial weekly, which showed that 60% of workers in France and Germany had returned to their offices for four-five days a week in August; while the figure in the UK was less than 40%.

The European average was around 50%.

“There is the potential that a second wave of the virus (already visible in Europe) could cut mobility once again, albeit likely less than in March-May when many governments took lockdown measures,” said the IEA.

“With the oncoming northern hemisphere winter, we will enter uncharted territory regarding the virulence of Covid-19.

“In last month’s report, we said that the market was in a state of ‘delicate re-balancing’. One month later, the outlook appears even more fragile."

Front page picture: Empty check-in counters in Kuala Lumpur's airport, 7 September
Source: Fazry Ismail/EPA-EFE/Shutterstock