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Saudis Prop Up Oil Prices, Cut Shipments To Asia And Europe

Saudis Prop Up Oil Prices, Cut Shipments To Asia And Europe

Saudi Arabia has announced reductions…

Oil Rally Continues Despite Slow Vaccine Rollout

Oil Rally Continues Despite Slow Vaccine Rollout

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Julianne Geiger

Julianne Geiger

Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.

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Why An Air Travel Recovery Won’t Spark An Oil Rally

Oil demand isn’t going to see a bump from air travel demand anytime soon, or so the International Air Transport Association (IATA) said in a recent press release. 

And when it says anytime soon, the industry body means that air travel won’t return to normal for years—for years, to be exact. 

And this air travel is exactly the shot in the arm that the oil industry needs right now. 

According to the IATA, 2.8 billion passengers are expected to travel in 2021. That’s 1 billion more passengers than it expects will travel in 2020. 

But that’s the extent of the good news as pertains to oil demand, which has seen considerable drop off this year as a result of all the pandemic-related lockdowns and travel restrictions imposed on the world.

The bad news is, those 2.8 billion passengers expected to fly next year is still 1.7 billion fewer than in 2019. Percentage-wise, that’s still an ugly drop off.

Data source: IATA

And the Revenue Passenger Kilometers, or RPK—a figure that the airline industry uses to track the total number of kilometers traveled by paying passengers—is expected to increase by 50 percent next year. Again, that’s the good news. 

The bad news is, this RPK is still 50 percent lower than in 2019.

The 2021 air travel recovery, such that it is, will come mostly from domestic travel within North America and Asia. The European market, however, relies mostly on international travel, and this is expected to remain stunted. Related: Oil Prices Drop On OPEC+ Uncertainty

The IATA summed up their bleak forecasts with this:

“Passenger volumes are not expected to return to 2019 levels until 2024 at the earliest, with domestic markets recovering faster than international services.” 

The extra-bleak “at the earliest” qualifier should have the oil industry—and OPEC specifically—shaking in their boots. And they are. 

Exxon, for starters, shocked the industry on Tuesday when it decided to—finally—write down some assets. And boy, did it ever. I guess when you are one of the five largest oil companies in the world, you have to do things big. Its write down—which came after years of catching flack for having a no write-down policy for years—crushed any expectations for such a write down at between $17 billion and $20 billion. That should signal to the market that Exxon does not expect that an oil demand recovery is right around the corner. Expect others to follow.

Then there is OPEC, or OPEC+. They are desperately trying to control the market by balancing the supply side of the equation. This has been an effective measure in the past—and it has been semi-successful in staving off an oil price disaster this time around. But the new element for 2020 is that oil demand has crumbled by millions of barrels a day. It’s hard to drain inventories, which are still stubbornly persisting in the world’s most visible market—the United States—a whopping 6% above the five year average for this time of year. This is despite a 2.2 million bpd decrease in production in the United States, and millions more barrels cut by OPEC+ as part of a concerted effort to “rebalance” the market, which is code for keeping prices in a tolerable range. 

With the demand destruction brought on by the coronavirus and the excess inventory of crude caused by the oil price war in the month prior to the coronavirus, OPEC’s manipulations have been only partially effective. 

And when we talk about demand destruction of crude oil, a huge chunk of it is consumed in the transportation sector. Global jet fuel demand accounts for 8% of the world’s total oil consumption. This means that when the forecast calls for a 50 percent reduction in RPK, we should expect a 4 percent drop in crude oil demand. And this is for next year, not for 2020. And for years, the IATA is expecting air travel to be diminished.  Related: Norway To End Oil Production Cuts On December 31st

As for the promise of a vaccine, help is surely on the way. But a promising vaccine is not weeks away, and perhaps not even months away. The first half of 2021 is unlikely to see a huge bump in air travel increases as the vaccine candidates roll out to essential workers and at-risk individuals. Analysts are not expecting it to have a significant impact on air travel until the second half of 2021. 

OPEC is well aware of the likely timetables of a vaccine rollout, and is well aware that demand will lag well into next year and even longer. This is why the group will most surely eke out a win that extends the current level of production cuts into the first three months (at least) of 2021, rather than allow its members to increase production by 2 million bpd starting in January as originally planned. 

Still, the Sunday after Thanksgiving was the busiest for US air travel since the pandemic started, but the oil industry shouldn’t bank on an extended rally anytime soon. 

By Julianne Geiger for Oilprice.com

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  • Mamdouh Salameh on December 02 2020 said:
    At the height of the COVID-19 pandemic, nobody would have imagined that China’s crude oil imports will break all previous records and average almost 12 million barrels a day (mbd) or its oil imports during the first 10 months of 2020 would be 12.7% higher than the same period in 2019. And yet, this is exactly what happened. Equally nobody would have expected India’s oil and gas demand in 2020 to rise to 2019 levels by September this year. And yet India has achieved exactly that against even a resurging pandemic. Global air travel recovery is no exception. Therefore, the author shouldn’t jump into hasty conclusions that global air travel recovery won’t sparky an oil rally soon.

    The advent of effective anti-COVID vaccines are changing the landscape of global oil demand very fast. A case in point is that the mere announcement of the successful testing of vaccines has led to a surge of more than 20% in oil prices within the last two weeks from $40 to $48 a barrel. Can you then imagine what a huge momentum and impetus would the start of a vaccination campaign this month in the UK, the United States and the European Union (EU) would give to the global economy and in particular the global air travel industry. And with availability of enough supply of vaccines to vaccinate a large percentage of the world next year, we can expect the travel industry to go back to normal in 2021.

    You gave ExxonMobil writing down assets worth between $17 bn and $20 bn as an indication that the oil supermajor does not expect an oil demand recovery soon. How very wrong you can be. The real reason is that Exxon wanted to maintain its level of dividends. The only way it can do this without sinking deeper in debt is to reduce its investments next year to between $16 bn and $19 bn, announce massive asset write-downs and reduce its global workforce by 15% by year-end 2021. Exxon is going to use its available funds purely on the business that sustains it, namely oil and gas.

    As for OPEC+, I am sure that it will reach the right decision, namely an extension of the current production cuts of 7.7 mbd for three more months starting January 2021 until the end of the first quarter of next year.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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