The 'new normal' for oil markets？

The 'new normal' for oil markets？

The global economy and oil markets are recovering after a historic slump in demand caused by the 2020 coronavirus pandemic. The large excess stocks accumulated last year are depleted, and global oil stocks, excluding strategic reserves, will return to pre-pandemic levels by 2021. However, the post-pandemic oil market may never return to "normal."

The pandemic has forced rapid behavioural changes, including new models of working from home and reduced air travel for business and leisure. At the same time, more and more governments are paying attention to the potential for a sustainable recovery to help drive a low-carbon future. Oil demand forecasts have been lowered as a result, and peak oil demand could come sooner than previously thought if governments implement strong policies to accelerate the clean energy transition.

These factors present producers and oil producers with a dilemma: they do not want to leave resources in the ground, nor do they want to build new capacity that may go unused. But if it leads to underinvestment, it could have geopolitical implications, exacerbating the risk of future supply shortages.

The demand recovery path is unbalanced：

Global oil demand has still not fully recovered from the impact of COVID-19, and there is little hope of a return to the pre-pandemic trajectory. In 2020, the beginning of our forecast period, oil demand is nearly 9 million barrels per day lower than in 2019 and is not expected to return to 2019 levels until 2023. Without more rapid policy intervention and behavioural change, long-term growth drivers will continue to push up oil demand. As a result, global oil consumption is expected to reach 104.1 million barrels per day by 2026. That would be 4.4 million barrels per day above 2019 levels. Compared to our forecast a year ago in the Oil 2020 report, oil demand in 2025 is revised down by 2.5 million barrels per day.

All of the growth in demand relative to 2019 is expected to come from emerging and developing economies, driven by rising populations and incomes. Asian oil demand will continue to grow strongly, albeit at a slower pace than before the pandemic. In contrast, demand in OECD members is not expected to return to pre-pandemic levels.

Both the speed and depth of the recovery are likely to be uneven, not only geographically but also across different oil sectors and products. Gasoline demand is unlikely to return to 2019 levels: improvements in energy efficiency and the shift to electric vehicles have partly offset the strong growth of gasoline in the transport sector in developing countries. Aviation fuel has been hardest hit by the pandemic and is expected to recover slowly, returning to 2019 levels only in 2024; However, the popularity of web conferencing could lead to a permanent change in business travel trends. The petrochemical sector remains the backbone of growth during the forecast period. By 2026, ethane, LPG and naphtha together will account for 70% of the incremental demand for petroleum products.

Spending cuts have slowed growth in world oil supplies：

The demand shock caused by the COVID-19 pandemic and the shift in investment towards clean energy will slow the expansion of world oil capacity over our six-year forecast period. At the same time, the historic collapse in oil demand in 2020 has created a record buffer of 9 million barrels per day of spare capacity, enough to keep global markets fully supplied for at least the next few years.

Against this backdrop, it is not surprising that upstream investment and expansion plans have slowed. In 2020, operators are spending a third less than budgeted at the start of the year (and 30% less than in 2019). In 2021, total upstream investment is expected to grow only slightly.

Plunging spending and project delays have constrained global supply growth, with world oil production now expected to increase by 5 million barrels per day by 2026. Unless more forceful policy actions are taken, global oil production will need to increase by 10.2 MB/d by 2026 to meet the expected recovery in demand.

Half of this increase is expected to be provided by Middle Eastern oil producers, mainly from existing shut-down capacity. If sanctions remain on Iran, Saudi Arabia, Iraq, the United Arab Emirates and Kuwait may need to use their spare capacity to pump at record or near-record rates to keep the world oil market balanced.

This marks a dramatic shift from the reality of US-dominated world supply growth in recent years. In the current policy environment, US production growth will recover somewhat as investment, activity and prices rise. However, there is little hope that growth will return to its recent highs. For the tight oil industry, there is a clear shift in the business model towards controlling spending, generating free cash flow, deleveraging and providing cash returns to investors, and prospects are subdued.

Global markets remain well-supplied for most of the medium term. But in the absence of new upstream investment, spare capacity buffers will slowly shrink. By 2026, global effective spare capacity (excluding Iran) could fall to 2.4 million BPD, the lowest level since 2016.