Global oil consumption has slumped. What does this mean for the MENA region?
The coronavirus pandemic has had a major impact on transport, travel and tourism. Many countries across the world have, at least temporarily, closed their borders and restricted the movement of their citizens through lockdowns in order to stem infection rates.
This unprecedented situation has had a significant impact on oil consumption. The big question is: will this accelerate peak oil – and what will the repercussions for the hydrocarbon-reliant MENA region be?
A slump in global oil consumption
April 20, 2020 is a date oil traders will always remember: the first day in history when oil prices turned negative. That day, West Texas Intermediate (WTI), the U.S. crude oil benchmark, fell from U.S.$17.85 at the start of trading to negative U.S.$37.63 by the close.
This happened after OPEC +, the grouping of some of the world’s largest oil producers, agreed to cut output by 10 million barrels a day in an attempt to stabilise oil prices after they were sent into a tailspin by the COVID-19 pandemic. Prices eventually recovered, and by mid-July, WTI was trading at just below U.S.$40 a barrel. Nevertheless, as the health crisis and the ensuing economic downturn continue to unfold, oil markets remain on high alert.
With planes grounded and transport at a standstill throughout the world, the hit on consumption has been significant. In March, the International Energy Agency (IEA) forecast that global oil demand would fall in 2020 due to the spread of COVID-19, constricting travel and broader economic activity. The IEA says the situation is “fluid, creating an extraordinary degree of uncertainty over what the full global impact of the virus will be.”
Indeed, the agency’s central base case scenario is for demand this year to fall for the first time since 2009 because of the deep contraction in oil consumption in China, and major disruptions to global travel and trade. In its July report, it forecast global oil demand to fall by 7.9 million barrels per day (mb/d) in 2020.
This situation could be accelerating the movement towards peak oil, according to some observers. Rystad Energy, a Norwegian research consultancy, predicted in its annual review of world oil resources that the downturn linked to the pandemic would speed up peak oil demand by about three years to 2027 to 2028. Rystad pointed to a diminishing of exploration efforts in remote offshore areas, which would lead to a reduction in the world’s recoverable oil by around 282 billion barrels.
The case for peak oil
What exactly is peak oil? It is the hypothetical point at which global oil production would reach its maximum rate, before eventually declining. The theory gained renewed attention in the past decade as the world attempted to cut down on carbon emissions, but is a concept that is much older.
U.S. geologist M. King Hubbert is widely credited with inventing this theory in the 1950s, when he proposed that oil production would follow a bell-shaped curve. It has been much discussed and contested but remains pervasive amongst some circles.
Although many experts put the cursor on the 2030s as the time oil production would peak, it has proven rather difficult to establish when exactly this would happen. In a 2019 research paper published in Science Direct, author Ugo Bardi notes that despite many predictions, “the expected world peak has not arrived, at least in terms of a reduction of the global supply of liquid fuels and, in general, the concept of peak oil has faded from the mainstream discussion as well as from the scientific literature.”
However, this is not entirely true. Saudi Aramco, the world’s largest oil producer, said in its initial public offering prospectus released in November 2019 that it believed demand growth for crude oil, condensate and NGLs would continue, levelling off around the year 2035 before possibly growing again. “The long-term oil demand plateau that Saudi Aramco presented is similar to S&P Global Platts Analytics’ long-standing forecast of oil demand growth,” it noted.
S&P Global Platts Analytics also expects overall oil demand growth to level off significantly in the 2030s, before showing marginal growth from 2035-40. “Our demand outlook is driven by growth in emerging economies, as well as growth in the petrochemical and non-passenger vehicle transport sectors,” it said.
In a recent interview with Bloomberg, IEA head Fatih Birol pointed out that global oil consumption has not yet peaked. “In the absence of strong government policies, a sustained economic recovery and low oil prices are likely to take global oil demand back to where it was, and beyond,” he said.
Green shoots of recovery?
The oil sector outlook may not be as bad as it looks. Despite an inevitable slump in global consumption, there are some encouraging signs that activity will recover. According to U.S. Energy Information Administration estimates, June global consumption of petroleum and other liquid fuels rose 10 mb/d from April levels as economies worldwide started to emerge from lockdown. It also now projects demand to recover by 5.3 mb/d in 2021.
The agency highlighted the efforts made recently by OPEC+ to curb supply. “Robust compliance with the oil cartel output deal and steep declines from other producers, led by the United States and Canada, has cut world oil output by nearly 14 mb/d since April. If the OPEC+ cuts stay in place as agreed, global supply could fall by 7.1 mb/d in 2020 before seeing a modest recovery of 1.7 mb/d next year,” it stressed in its July report.
Most OPEC producers, many of which are in the MENA region, have been more resilient to the pandemic’s impact than expected – especially compared to their non-OPEC counterparts such as the United States (-49 billion barrels) and Russia (-31 billion barrels), noted Rystad Energy.
“Non-OPEC countries account for the lion’s share of ‘lost’ recoverable resources with more than 260 billion barrels of undiscovered oil now more likely to be left untouched, especially in remote exploratory areas,” Head of Analysis Per Magnus Nysveen said.
Oil-reliant MENA in the spotlight
The situation will create challenges for the MENA region, where the oil and gas sector is the most important in many economies. The region now faces the dual shock of having to deal with the coronavirus pandemic and the recent collapse in oil prices.
According to the World Bank, the two shocks of COVID-19 and the oil price collapse are intertwined, yet distinct. “On one hand, the demand component of the oil shock is linked to the sharp reduction in oil consumption stemming from precautionary measures to stop the spread of the virus, including lockdowns, which have brought economies around the world to a standstill,” it noted.
“Once the spread of the virus is stopped, the preventive measures at the root of the economic recession will be rolled back. The speed of that recovery will depend on how swiftly and decisively governments take measures to mitigate the economic and financial dislocations from the health crisis. But the supply component of the oil shock is likely to be persistent and drive oil prices lower for longer. The two shocks differ in their duration but also their likely potential consequences and associated risks of inaction,” the organisation added.
The World Bank also notes that in MENA it is likely that “lower oil prices will hurt both importers and exporters - exporters directly and importers indirectly from reduced foreign direct investment, remittances, tourism, and grants from exporters. Some countries, such as those in the Gulf Cooperation Council, still have buffers and should use them. Other oil-exporting countries, such as Algeria and Iran, are exhausting their buffers and will have to rely on flexible exchange rates to manage the current situation and conduct much needed reforms in private-sector development and broader economic transformation.”
It’s clear that the pandemic will not only impact oil markets, but increase unemployment and poverty, widen public deficits, lead to numerous personal and corporate bankruptcies, and have a lasting negative impact on Middle Eastern economies and societies. In MENA, despite diversification efforts, oil is not just a commodity, it is the life of the economy.
Going forward, when considering investments in energy stocks, market players should pay close attention to any developments linked to the pandemic. Signs of a resurgence or a significant second wave of infection would put a dampener of any sector recovery, while positive news on a vaccine against COVID-19, meanwhile, would certainly help the ailing tourism and travel industry. It is also important to pay very close and constant attention to oil market statistics – not just demand, but inventories, supply levels and any OPEC or major player action. Like in any crisis, there are opportunities.
Oil stocks have taken a battering since the pandemic caused havoc around the world - with cheap valuations around, there may bargains to find. On the other hand, investors may want to tackle this issue in a totally different way and consider alternative energy stocks, and renewables in particular, with the IEA expecting investments in the latter to reach around US$10 trillion by 2040.