Oil demand may not recover until 2022 — report
The coronavirus pandemic could hobble oil demand well into next year, a trend that will have an outsize effect on the U.S. oil industry, the consulting firm IHS Markit said.
Demand for oil worldwide is bouncing back, but it will level off between 92% and 95% of pre-pandemic levels and likely stay there until the end of March, Jim Burkhard, vice president and head of oil markets at the firm, said in a research note.
U.S. oil production will recover more slowly than the rest of the world through 2021, averaging 10.1 million barrels a day, Burkhard said in a follow-up interview. That’s about 20% lower than the pre-pandemic level of 12.7 million barrels a day.
And even those modest improvements could be stalled if the virus isn’t under control.
“For demand to fully return, travel — especially air travel and commuting to work — needs to get back to normal,” Burkhard wrote in the note. “And that won’t happen until there is containment of the virus and effective vaccines.”
The research is more bad news for the global oil industry, which has been hammered by the quarantines and the economic slowdown that the virus brought. Some European producers, including BP PLC and Total SA, have predicted that the virus will speed up the ultimate decline of oil demand (Energywire, Aug. 5).
The virus and the disease it causes, COVID-19, have killed 815,000 people worldwide and about 178,000 in the United States. During the peak of the outbreak, oil demand dropped by 22%.
While some parts of the economy have begun to recover, travel remains far lower than before the outbreak, holding down oil consumption. Retail gasoline sales in the United States are 17% to 18% below previous years, and jet fuel use is down about 50%.
IHS expects oil demand to recover and exceed pre-COVID levels by 2022 or later, but the interim will be rocky, especially for American producers. Burkhard said he expected prices to remain between $40 and $50 a barrel until the first quarter of 2021, down from more than $60 a barrel at the beginning of this year.
American producers typically have higher costs than their Middle Eastern competitors, so they will be under pressure to control their spending and focus on turning a steady profit rather than growing their production.
“The reality is the U.S. upstream industry is going to have to live within its cash flow,” Burkhard said.