After months of a deep and harrowing slide, fuel demand across the world is finally starting to sputter back to life. Traffic data, pipeline flows, and sales at gas stations in the Texas City of San Antonio, Beijing, and Barcelona all suggest that the oil demand slump may have already bottomed out. But don’t rush to pop the champagne corks just yet. Indications so far are that the road to full recovery is going to be harder than climbing out of a subterranean pit, with many oil traders predicting that it might be a year or more before demand returns to pre-crisis levels.
A growing minority are even less sanguine and speculate that it may never get back there again.
Royal Dutch Shell plc (NYSE:RDS.A) belongs to the latter camp: Company CFO Jessica Uhl warned investors of “ ...major demand destruction that we don’t even know will come back,” during the company’s latest earnings call.
The Anglo-Dutch supermajor, a deepwater operator and leading natural gas trader, stunned investors after announcing the first dividend cut since the 1940s, saying it deemed it necessary to preserve liquidity given the uncertainty regarding when the pandemic will finally be contained.
Shell declared a $0.32/ADS quarterly dividend from a prior dividend of $0.94, good for a 66% cut. It also announced revenue of $60.03B (-28.3% Y/Y), $9.58B below Wall Street’s consensus; non-GAAP EPS of $0.37 beat by $0.09 while GAAP EPS of $0.00 missed by $0.18. The dividend reduction alone is set to free up around $10 billion for the bottom line. Shell’s dividend reduction will set free ~$10 billion for the bottom line.
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The dividend reset has taken many analysts by surprise, given that oil majors Chevron Corp. (NYSE:CVX) and ExxonMobil (NYSE:XOM) have both announced deep capex cuts, but left the dividend intact.
Maybe it’s just a matter of time before they also follow suit.
Analysts are warning that a V-shaped recovery is highly unlikely, with the sheer scale of the demand destruction--estimated at a staggering 30 million barrels a day in April--making for a long and tough road back to the pre-crisis global demand of ~100 million barrels per day.
Shell says it’s bracing itself for a worst-case scenario: Demand to never fully recover.
“I think a crisis like this has the potential to capitalize society into a different way of thinking, much as the Paris Agreement has had,” company CEO Ben van Beurden has told investors.
Url says the company expects an “L-shaped recovery,” implying that oil demand will stay at ~9% below last year rather than rebounding sharply or even slowly in a U-shaped trajectory.
Citigroup does not see a full recovery in jet fuel demand until well into 2022, while Boeing’s CEO expects passenger traffic to remain depressed for three more years.
The IEA is a bit more optimistic, though.
The energy analyst has estimated that May consumption will be 25.8 million barrels below that level, while June consumption is expected to be about 14.6 million barrels below normal. However, it sees December consumption clocking in at just 2.7 million barrels below 2019 levels.
Peak Oil Demand
With oil and gas companies set to lose $1 trillion in revenues in the current year--or 40% lower than 2019 revenue of $2.47 trillion--it’s not hard to see where these gloomy outlooks are coming from.
But the notion that we might have crossed peak oil demand is not all that far-fetched.
Just last year, the IEA predicted that global oil demand would peak in the mid-2020s and plateau around 2030.
The IEA had predicted that global oil demand would expand by about 1% annually to hit 105.4 million bpd by 2025, after which growth would shrink substantially with consumption peaking at 106.4 million bpd.
The silver lining, however, was that natural depletion would shrink oil supply and lead to higher prices, averaging $90 a barrel in 2030 and $103 in 2040, according to the agency.
The Covid-19 pandemic has drastically altered the market dynamics, and nobody seems sure how the energy sector will look like when it’s all over. Just don’t be surprised if consumers and global investors decide to, once and for all, vote with their wallets and give the sector a wide berth as Shell has predicted.
By Alex Kimani for Oilprice.com
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