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Global Oil Demand Starts Recovering?

Global Oil Demand Starts Recovering?

A few articles have been published on Bloomberg.com and Financial Times during the weekend about Oil’s recovery.

What we see as a result is not promising for Oil prices: Oil’s Recovery Could Take Decades, Not Years
Or the industry might never fully rebound from the virus, leaving massive spare capacity all along the supply chain

Let’s take a look at the highlighted part of the articles.

“I believe we have seen the bottom,” said Marco Dunand, co-founder of Mercuria Energy Group Ltd., one of the world’s top-5 oil trading houses.

But the recovery is extremely slow. Oil traders believe it’s likely to take more than a year, and perhaps much longer, before global demand reaches the pre-pandemic levels of roughly 100 million barrels a day. A growing minority even speculate it may never get there again.

Historic Crash
Oil demand is expected to contract by a record amount this year.

The likely shape of the revival has been a hotly contested topic. A V-shape was discarded a while ago. It’s possible it could be U-shaped, with a relatively long period along the bottom, or L-shaped, with demand never returning to where it once was.

Perhaps the Latin alphabet doesn’t have a letter for the right shape. The square-root mathematical symbol may offer, to a point, an alternative: first, a V-recovery as lockdowns are relaxed, followed by a long, flat tail as lifestyle changes, such as more work-from-home, become more normal.

‘Bumpy Road’
Certainly, airlines don’t expect a return to the 2019 level of demand for years to come. It’s what Ed Morse, a veteran oil watcher at Citigroup Inc., calls “the winding, bumpy road to oil recovery.”

The sheer scale of the demand destruction — about 30 million barrels a day in April — means the comeback is going to be a painful process. The International Energy Agency estimates that consumption will be down 25.8 million barrels a day in May, and 14.6 million in June. In December, it would still be 2.7 million a day below 2019 levels.

Murky Details
As with many economic indicators, oil demand data comes with a significant lag. So traders rely on proxy estimates for a near real-time view. One is highway traffic. Another is the amount of gasoline and diesel that’s trucked out from pipeline terminals into fuel stations.

In the U.S., the amount of gasoline supplied to the market increased last week to nearly 5.9 million barrels a day, up from 5.1 million in the first week of April but well below the typically more than 9 million before the virus, according to the official data. Early last month, refiners saw gasoline demand at 55% of normal level, which improved to 64% in the latest seven-day average. Valero confirmed on Thursday that it’s seeing some pick-up.

Lots to Spare
OPEC’s spare production capacity is set to jump to more than it has been in over three decades


Source: Bloomberg

But those OPEC producers are now cutting production by more than 20%, and non-OPEC countries are seeing their output fall by similar percentages. True, some of the wells that get shut will never be reopened, but most will sit waiting for their owners to see an opportunity to get them back to work. That overhang of spare production capacity will put an effective cap on oil prices, just as it did throughout the 1990s.

No amount of Saudi-led supply management, or U.S. presidential bullying of foreign oil producers, will be able to remove that spare capacity. And once the current crisis is past, Riyadh may be less willing to play the role of swing producer, restraining its output while everybody else reopens the taps.

Every time oil prices rise, producers will rush to use their idled capacity, undermining the recovery. After the oil-price slump of the mid-1980s, it took two decades for prices to return to their previous levels — longer if you build in the effects of inflation. This time the wait could be even more protracted.

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