Oil companies, oil refiners, and oil traders believe that the worst of the demand destruction is already behind us. But the jury is still out on how long it will take for global oil demand to recover to pre-COVID-19 levels–if ever. The current prevailing opinion among industry professionals, international organizations, and analysts is that it could be more than a year before oil demand returns to 2019 levels.
There are early encouraging signs that demand is already edging up from the bottom that it hit a couple of weeks ago. Yet, the industry may have to wait until the end of 2021 to see global oil demand back up to 100 million barrels per day (bpd).
What’s worse, some analysts say demand may never return to those levels.
Shell’s chief executive Ben van Beurden said on the earnings call last week that the current crisis is a “crisis of uncertainty,” and we don’t know what’s on the other side of it, as the supermajor slashed its dividend for the first time since World War II.
“We are looking at a major demand destruction that we don’t even know that will come back. So the oil price may come back. But if the volumes are significantly lower, we still have a major dislocation, of course, in our own cash wheel,” van Beurden said.
Demand will return. However, it will be a slow journey on the road to recovery. According to one of the biggest oil firms in the world, Shell, maybe we’ve already hit peak oil demand—a sobering view in stark contrast with opinions from just three months ago that suggested global oil demand would continue to grow every year for at least another decade.
Still, signs are already out there that the worst of the demand crash is behind us.
“I think there probably is a pent-up demand for folks to get out of their houses and get mobile and to shop again and to go to restaurants again,”
Joe Gorder, chairman and CEO at one of the largest refiners in the U.S., Valero Energy, said on the earnings call last week, commenting on the uptick in U.S. gasoline demand.
“[T]here are some, I’d say, encouraging early signs in the transportation sector, particularly road transportation.”
Last week, U.S. nationwide gasoline prices edged up for the first time in ten weeks due to a slight uptick in demand, according to AAA. For the week to April 24, the EIA reported a surprise draw in gasoline inventories, suggesting that the U.S. has put the worst of the demand slump behind.
U.S. gas demand rose from 5.31 million bpd to 5.86 million bpd in the week to April 24, but it was still 3.37 million bpd lower than the 2019 rate for that week, AAA says.
“As more states aim to end their stay at home orders and businesses around the country begin to reopen, gas demand is likely to continue increasing and pump prices are likely to slow their decline and possibly increase, too,” AAA noted. Demand is slowly crawling up and will continue to do so, both in the U.S. and in Europe, where major economies such as Italy and Spain started to relax strict lockdowns in early May.
The question now is how long it will take to see demand back up at around the levels seen in 2019. According to the top executives at some of the world’s top oil trading houses, we have already seen the bottom of demand loss. Still, the recovery could take more than a year.
Torbjörn Törnqvist, chairman and CEO at Gunvor Group, told Bloomberg’s Javier Blas that the market would take a long time to rebalance and oil prices would stay capped at around $40 a barrel until late in 2021.
According to the International Energy Agency’s (IEA) latest estimates as of early May, global oil demand is set to drop by a record 9.3 million bpd in 2020 from 2019. The demand destruction in Q2 would be 23.1 million bpd, while the recovery in the second half of 2020 will only be gradual.
“Nonetheless, demand is not expected to reach pre-crisis levels before the end of the year, with December demand projected to be down 2.7 mb/d from December 2019 levels,” the IEA said last week.