The OPEC has no option but to adapt. The sharp drop in crude demand sparked by the pandemic and the economic downturn is not circumstantial. Low consumption will continue over the next decades, in a marked contrast with the cartel’s outlook from a year ago. The shift in the oil market is not transitional.
Some OPEC members are starting to acknowledge the possibility, unthinkable just six months ago, that oil demand may not recover to pre-pandemic levels, according to Reuters. This reality will require a change of strategy in the oil production group. A production cut deal, which until recently helped increase oil prices, will be of no use in a scenario of sustained demand drop.
The organization is facing a dramatic adjustment in case consumption enters a permanent downturn. The group will have to closely manage its cooperation with outside producers, like Russia, which will be in need of capital to continue its arms and geopolitical dominion projects.
— IHS Markit (@IHSMarkit) July 7, 2020
Crude demand for the rest of the year could fall to 3.7 million barrels per day, according to a report published by Rystad Energy.
The progressive economic reactivation in Europe and the rest of the world could boost demand. However, the rise of coronavirus cases in other large oil consumers (United States, Brazil, and India) counteract the progress in Europe.
Rystad believes that when a second wave causes widespread total shutdowns, oil demand will not be as hampered as in April, when the virus shocked oil markets. The world has better information and can implement more specific blocks and better control the rise of infections. “The world cannot handle another economic crisis,” warns Rystad.
The firm predicts that oil demand will average 89.77 million barrels per day in 2020. In 2021, it would reach 97.17 million, still below the 2019 average (close to 100 million). It could pick up in late 2022, considering that aviation will have fully revived by then.
Like Rystad Energy, the OPEC revised its forecast for global oil demand for 2020 early this month, indicating a downturn by 8.9 million barrels.
The summer fun may be over.
With OPEC+ adding production and a gloomier oil demand outlook, Aug-Nov-20 looks poised for 4-months of consecutive implied stock builds, a total of 170 million barrels on top of current 1.4 billion barrel overhang.
— Rystad Energy Oil Markets (@RystadEnergyOil) July 28, 2020
More in the long term
Despite the optimistic outlook on recovery, there are clear signs that oil demand may not recover to pre-crisis levels. For instance, Google is willing to allow their employees to work from home at least until July 2021, the Wall Street Journal reported. The plan will be valid for nearly all the 200,000 full-time employees and contract workers in Google and its parent company Alphabet.
This initiative could lead other tech giants and companies in other sectors to extend their home office time and allow employees to permanently work from their homes.
After the crisis
In the short term, OPEC faces the challenge of managing the oil supply during the crisis. Containment measures and restrictions on mobility led to a historic drop in demand and oil prices. But after the slow return to normality and a post-pandemic scenario, in the long term a new problem arises for the cartel. It must get the most out of its oil and get the most revenue in a world where demand growth could be much slower than calculated, even zero, or worse, negative.
A key concern for the OPEC is whether the Covid-19 crisis has significantly accelerated the timeline for maximum oil demand or if we are past that point.
Senior industry executives are not committing to making predictions, but acknowledged earlier this year that there is no telling what lies beyond this crisis. They also admit that oil demand may have peaked.
“Energy demand, and certainty mobility demand, will be lower even when this crisis is more or less behind us. Will it mean that it will never recover? It is probably too early to say, but it will have a permanent knock for years,” Royal Dutch Shell chief executive Ben van Beurden told HIS Markit in an interview in early July.
Meanwhile, BP CEO Bernard Looney commented “A lot of people ask about peak oil. The answer is we don’t know. I think that’s the reality. As you look out in the future, is oil demand going to grow at 3-5% per annum for the next 20 or 30 years? No. “What is going to happen? Oil demand growth is probably slowing.”
Oil prices declined on Tuesday as rising coronavirus infections stoked fears over weaker crude demand. pic.twitter.com/7qaXJTv6Ii
— Focus 聚焦中国 (@FocusChinaEN) July 29, 2020
The inscrutability of the OPEC
As per usual, the OPEC has not publicly expressed any concerns regarding “peak oil demand”. Nonetheless, a lasting change in demand patterns after the crisis would have a significant impact on the cartel and its members, many of which greatly depend on oil revenue.
In this scenario, there may be many closed meetings and brainstorm sessions on what to do. The options are scarce, however. For the OPEC, it is no longer about turning the situation in their favor. Now, the cartel will have to change in favor of a new reality. It cannot reverse the drop in crude demand, but will instead have to learn to live with it.
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