Bloomberg
Remember negative oil prices and the fear that every storage tank on the planet would get filled to the brim? That seems a long time ago, with West Texas Intermediate crude now hitting $40 a barrel and the buildup of stockpiles poised to go into reverse. The warning sent by that trip below zero was heeded. Oil production was slashed and the crisis averted.
But if you were hoping for a quick, V-shaped recovery in oil demand, look away now.
The International Energy Agency published its latest oil market outlook last week, pushing its quarterly forecast out to the end of 2021 for the first time. It doesn’t think demand will have fully recovered by then. In the final quarter of next year it predicts global oil demand will still be running about 2 million barrels a day below pre-pandemic levels, and more than 4% below where it might reasonably have been expected to be in the absence of the crisis.
That may not seem like a lot, given the depths from which we’re emerging, but it will have big implications for oil markets and the oil industry.
A look at the nearer-term outlook helps explain why recovery will take time. While expectations for demand destruction this quarter are starting to look a little less forbidding than they did a month ago as lockdowns are eased, that was clearly the easy part. The last 10% or so of lost demand is looking more difficult to recover.
Yes, the IEA revised its second-quarter global oil demand estimate up by what, in normal times, would be a huge 2.1 million barrels a day, but it still sees a year-on-year decline of close to 18 million barrels, or 18%. That’s the biggest drop in oil demand on record by a wide margin, dwarfing the 3.4% drop during the worst quarter of the 2008-2009 financial crisis.
And more telling, the recovery slows dramatically from the third quarter onward.
The return in demand so far, combined with output cuts by both OPEC+ and producers outside the group — including those in the U.S. — has probably brought global oil supply and demand back into balance, and stockpiles will start to be drawn down in the second half of the year. But the amount of stored oil that needs to be burnt through before there is room for producers to pump more is huge. Enough of the black stuff has gone into storage tanks, caverns and ships over the past six months to drive every heavy truck in the U.S. around the world five times — if it could all be turned into diesel fuel.
By the end of this month, global stockpiles are expected to be about 2.7 billion barrels above where they were at the end of 2013. That’s nearly four times the excess seen after the first shale boom in early 2017, when oil prices collapsed toward $25 a barrel. That’s an important point of comparison because it was then that Saudi Arabia and others decided that Organization of Petroleum Exporting Countries wouldn’t, or couldn’t, manage the oil market on their own — and the wider OPEC+ group was created, bringing more countries, including Russia, to the table.
Their cooperation has been far from smooth, but worryingly for the producer group, their somewhat belated actions during the pandemic have been so successful that WTI crude is back at a level that’s going to encourage American shale oil producers to start pumping again. While that may not yet be high enough to get them drilling new wells, it is enough to get them to reactivate some of those they shut during the depth of the pandemic and even to start fracking some of those they had already drilled but not completed.
Little wonder, then, that Saudi Arabia pressured those OPEC+ members that failed to meet their output reduction targets in May to compensate with deeper cuts in the months ahead. It renewed that pressure when the group’s monitoring committee met last week and is going to have to keep policing that deal for many more months to drain those tanks full of oil.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies
