A crude downturn amid pandemic

THE mathematics is fast changing. Not long ago, oil demand was expected to peak around 110 million barrels per day (bpd). In 2007, the Organisation of the Petroleum Countries (Opec) had forecasted the world demand to hit even higher — 118m bpd in 2030.

That is no more the case now. Not only peak demand numbers are going down but are much closer than initially thought.

By 2019, even before the pandemic hit the world, courtesy the changing global energy mix, the Opec forecast of peak oil demand had dropped to 108.3m bpd. Now, the “lingering implication” of the pandemic has lowered Opec’s demand projections further. The Opec now does not expect to fully bridge the gap in the peak demand forecasts during the period to 2045.

As per the International Energy Agency’s World Energy Outlook 2020, though global oil demand recovered from its historic drop in 2020, demand in 2030 is set to be 2m bpd lower than previously projected. Thereafter the IEA expects the demand to plateau, citing several reasons for its projections. It underlines the fact that the vehicle turnover is set to slow thereafter, with 9m consumers deferring car replacements in 2020. And in the meantime, sales of electric vehicles remain resilient.

Norwegian energy consultancy Rystad is now forecasting oil demand is set to peak around 102m bpd by 2028 and not 2030. The world has already passed “peak oil” demand, underlines Carbon Brief analysis of the latest energy outlook from oil major BP. It adds that demand could soon fall rapidly in the face of stronger climate action – by at least 10 per cent this decade and by as much as 50pc over the next 20 years.

The Covid-19 pandemic has hit the oil industry hard. And with the second wave of the coronavirus underway, oil consumption is set to get another battering. Current lockdowns are threatening the very fabric of the oil industry. And several countries are beginning to get back on strict lockdown to contain the pandemic.

On November 3 as the US went to polls, Austria began its latest lockdown. A week earlier, France began implementing its second lockdown that is expected to last, at least until December 1. Germany is also under lockdown since last week. This is going to impact energy consumption in Europe’s most industrialised state. The energy market research group AGEB is saying; Germany’s energy consumption is set to fall this year by 10pc while its crude oil consumption would go down by 3pc due to these additional restrictions on the economy.

The UK and Portugal are also under a second lock down. In a desperate attempt to contain the virus, Italy has also announced restricting travel, introducing night time curfew.

All these carry significant implications to the world of oil and energy, both in the short term and in the long term. On various counts, Opec is under severe pressure. Opec members’ oil revenues are falling. It is expected to fall this year to the lowest level in 18 years, says the US Energy Information Agency (EIA). Opec members are set to earn $323 billion in net oil export revenues this year, compared to $595bn last year, the EIA added.

Just to understand the dynamics further, Saudi state oil company Saudi Aramco has reported 45pc lower profit in Q3. Aramco has been reporting consecutive falls in quarterly profits since it began disclosing earnings last year, piling pressure on Saudi government finances. Aramco’s net profits for the first nine months of this year, dropped 48.6pc to $35.02bn, the company said.

This takes Opec to a precarious position. It is faced with a double whammy. While demand is crumbling, it is also faced with low market prices due to the global economic slowdown.

What could the Opec do? The economies of most oil producers are single product economies. These states are almost solely dependent on oil income. Many oil producers are now beginning to feel unease at output controls. There were indications that from next year, the producers’ group was thinking in terms of opening the taps – at least somewhat. Yet, the lockdown and crumbling demand make it even difficult for the Opec to open taps any further.

As per Julianne Geiger writing for Oilprice.com, there has been talk among Opec members and analysts that it may have to waylay that plan and extend the cuts beyond January 2021 to some indefinite future date.

That may not be easy for the Opec. How to balance their respective budgets would remain a key issue of the crude equation. And all this carries political connotations too, one but cannot help concede.