COVID CLOUDS OIL HORIZON

Samantha Amerasinghe assesses the toll of the pandemic and oil price war

The world is learning to live with less oil; and it may never look back. COVID-19 has added a massive layer of uncertainty to the oil market and its outlook. Demand for oil has plummeted as the coronavirus has locked down billions of people in their homes and left aeroplanes immobilised on runways for some three months.

In 2020, the dynamics of falling oil demand combined with a supply glut reminiscent of a time in the mid-1980s (when too much supply and too little demand kept oil prices low for 17 years) have been detrimental to the oil market.

Global oil demand this year is expected to contract for the first time since the 2009 world recession by almost a third, raising concerns that a glut of unwanted supplies will overwhelm storage capacity.

Oil producers continue to grapple with excess supply and the worst demand shock in history due to major disruptions to global travel and trade, and the deep contraction in oil consumption in China – the largest energy consumer on the planet, accounting for more than 80 percent of global oil demand growth last year.

Before the pandemic hit, the world was consuming about 100 million barrels of oil a day; today, the demand is somewhere between 65 and 70 million barrels. So in a worst case scenario, about a third of global output needs to be shut.

The International Energy Agency (IEA) expects the demand for oil to fall by a record 9.3 million barrels a day in 2020, reversing nearly a decade of growth.


Oil prices turned negative for the first time in history in April. There are signs of a rebound with Brent oil back above US$ 35 a barrel; however, prices remain ultra-low despite Saudi Arabia, Russia and the rest of the OPEC Plus alliance agreeing to cut production by 10 million barrels a day (about 23% of their production levels), in May and June.

While oil demand is recovering, it is uncertain how sustainable the pickup will be given the risk of a second wave of infections and lockdowns.

The oil industry is bracing for the effects of the pandemic to linger. The ‘new normal’ – employees working from home, scarce international travel, and citizens in once polluted cities now appreciating cleaner air and blue skies demanding tougher emission controls from their governments to tackle the climate crisis – could mean that global demand for oil may never return to its 2019 record high.

This is a scary prospect for countries such as Russia, Nigeria and Iraq in particular as they depend heavily on selling crude oil.

Before the pandemic, the future of oil looked very different. There was optimism that the growing emergence of electric cars, increased energy efficiency and a switch to alternative sources would result in a peak in oil demand in 2040 or thereabouts.

But the future now rests on how quickly the COVID-19 pandemic can be contained across the world.

Wall Street has forecast that demand will recover fully only in 12 to 24 months based on two key assumptions: that governments move to ease lockdown restrictions quickly and economic activity will bounce back rapidly when restrictions are lifted.

Both assumptions seem optimistic; but should they play out, we may witness demand recovering to 2019 levels in 2022.

If governments are slow to lift lockdown measures or the threat of a second wave of infections in the third quarter of this year materialises, demand may never fully recover. Even if a second wave of the virus is less intense, it is going to keep oil demand down as entrenched behaviours will be difficult to change, the longer the crisis lingers.

Businesses and economies may decide to hold on to some of the practices they have learnt during the lockdown such as virtual working, which might even become the ‘new normal.’ Aviation may never go back to the pre-crisis growth rates as businesses scale back on travel and people wonder if travelling is a necessity.

Such behavioural shifts could encourage governments to take more aggressive action to promote renewable energy and pivot away from the use of fossil fuels. However, the oil industry’s loss is not necessarily a gain for green energy and the climate because lower prices are slowing down the transition to renewable energy sources.

Europe has taken the lead and pledged to cut emissions to at least 40 percent below 1990 levels by 2030. According to the IEA, the pandemic has provided a “historic opportunity” to pour investment into technologies that cut greenhouse emissions.

EU leaders have pledged to make their coronavirus relief packages align with the Green Deal programme. But the Trump administration bailed out struggling airlines and made low-interest loans available to fossil fuel companies without requiring action to stem the climate emergency.

So much rests on the outcome of the 2020 US election. Democratic presidential nominee Joe Biden is more likely to adopt a Green New Deal type approach to rebuilding the economy.

COVID-19 won’t destroy the oil industry but what has transpired will ultimately change the nature of the industry that emerges. Whatever happens, the oil industry will never be the same again following the double whammy of the pandemic and price war.