A recovery in jet fuel, gasoline, and crude oil demand is the one thing standing in the way of drawing down the existing inventory glut for crude and crude products. And this glut is the one thing standing in the way of oil prices. While fuel demand started to pick up a couple of months back, that rally has since stalled, leaving some to wonder what is left for the oil industry in the short or even medium term.
The Covid-19 Factor
One of the largest influencers on fuel demand today is the daily number of new coronavirus cases-or rather, the trend of the daily new coronavirus cases. It is a closely watched metric that state officials use to determine what businesses should remain open, what businesses should close, whether kids should learn from home or school, and what quarantine measures should be adopted when it comes to travel. Individuals also watch this metric to determine their comfort level with being out and about.
In the United States, North Dakota, Missouri, Tennessee, Arkansas, and Oklahoma are seeing rising trends in the number of new coronavirus cases daily, with the White House telling Missouri that it should crack down on certain activities, such as closing down bars and placing further restrictions on restaurants.
Vaccine Reality Check
Realistically, demand for fuel is not expected to fully recover until a vaccine is made widely available. While vaccines are in the works and great progress is being made, it is a bit optimistic to think that everyone will be able to get a vaccine by the end of the year or even the end of the first quarter.
No, it will take much longer than that.
Drugmakers are already testing some of the most promising vaccines in the clinical trial phase. These clinical trials will take some time, and even with Operation Warp Speed, a government program that is funding the production of some vaccine candidates in the hopes that the clinical trials will be successful, it will be early next year before even ten million doses will be available.
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Millions of doses is a far cry from what will be necessary to inoculate the hundreds of millions of people that live in the United States, especially considering that most vaccines will require two doses, given a month apart. It will likely be the end of 2021 before there are billions of doses available.
But even that won't be the end of the problem, because that's not enough doses to get the entire world vaccinated. And that's not even taking into consideration the large swaths of people that aren't interested in getting the vaccine at all-more than one-third of Americans say they aren't interested in getting a vaccine at all. And more aren't sure.
Meanwhile, the coronavirus will rage on, although likely in smaller numbers. Still, it is expected to affect fuel demand.
Leaving on a Jet Plane
One of the largest factors determining fuel demand is air travel. And air travel is still down by about half compared to the same time last year.
For the last week in August, Flightradar24 showed that commercial flights are still 45% down compared to last August-and the rate of recovery has seemed to slow. Air travel will pick up after the vaccine is rolled out en masse, but this recovery won't be realized until 2022 due to the timing of the vaccines and when they will be ready for most of the population.
And even that's not a full recovery. For 2022, air travel is expecting to recover by only 75%, according to Bank of America Securities. By 2023, the recovery is expected to increase to 90%--which still isn't great considering that's years away.
Road Travel
Demand for gasoline for road travel increased in June, it's been pretty much flat ever since, as the states lighten up restrictions and then crack down again, and the virus figures are like a game of whack-a-mole with cases going down in some states while increasing in others.
Schools aren't open in full swing yet in most of the country. Neither are bars or restaurants and a handful of other critical businesses that encourage people to get out and on the road. Vacation season was muted at best.
Related: IEA: Oil Demand Recovery Has Stalled
This has resulted in U.S. motor gasoline supplied by energy companies-essentially used in place of actual demand figures-falling from 8.933 million bpd at the end of January before the pandemic to 5.065 million bpd in early April at the height of the lockdowns. It swung up to 8.809 million bpd in mid-July, while the market rejoiced at the recovery. However, there has been little improvement since then, with the last week of August, coming in at 8.786 million, according to EIA data.
Compared to the same time last year, gasoline demand is still more than 1 million bpd off, and that demand is no longer on an upward climb.
Goodbye Driving Season
It could tick up in terms of how far off last year's levels fuel demand sits. But with driving season in the United States behind us with the coming and going of Labor Day weekend, road travel isn't expected to improve by leaps and bounds over current levels.
What this means for oil companies is tightened lender purse strings, stubbornly high inventories, an extended refinery maintenance season, and ultimately, more bankruptcies-and the industry has already seen its fair share, with 23 bankruptcies filed in the first half of the year.
By Julianne Geiger for Oilprice.com
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Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group. More
Comments
From the start, I projected that global oil demand will end 2020 at 96 million barrels a day (mbd), 5 mbd short of pre-COVID pandemic levels of 101 mbd.
With aviation fuel accounting for 7.8% or 7.89 mbd of global oil demand and with air travel at 45% level currently, there is a loss of 4.34 mbd of oil demand. And with road travel virtually back to pre-pandemic levels, a lot of ado is being made about global oil demand souring or stalling.
The fundamentals haven’t changed recently. China is still leading global oil demand by its roaring crude oil imports. China’s economy is surging ahead and is projected to grow at 6.8% in 2021 according to the IMF compared with 6.1% in 2019. Most of the weakness in the global economy currently emanates from the sad state of the US economy. Still, the US economy has the habit of surprising the world by its sudden rebound.
Furthermore, a vaccine would be with us before the end of the year or in early 2021.If the Russian vaccine proves effective against the Russian people in October, it could be made available to the world shortly after.
Based on the above, global oil demand will be back to pre-pandemic levels by the end of 2021 if not slightly earlier. Moreover, oil prices could be expected to hit $45-$50 a barrel before thend of 2020 and touch $60 in early 2021.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
I guess we just have to accept that there is not much support for the demand upside. China might run out of storage soon after frenzy of cheap oil purchase. And China might show some recovery but their economic is also relying on export. As the rest of the world are still recovering, it is hard to see their economy reaching pre-pandemic level any time soon.