Just when the global economy and oil markets started to gain ground in lockstep after a pandemic-devastated first quarter, risks are rising again as new waves of infections buffet the United States, Russia and other major countries.
As of Monday (July 6), there were nearly 11.5 million confirmed global Covid-19 cases and over half a million deaths worldwide, according to the John Hopkins Coronavirus Resource Center.
Over a quarter of those global infections have been recorded in the US, with as many as 45 of 50 states recently reporting a spike in new infections. At least 19 states have paused or reversed their reopening plans in response to surging coronavirus numbers.
While the US and other countries grapple with an uptick in infections, the fallout for global oil markets could get very nasty.
The question for traders, oil companies, economists, central bankers and others isn’t just how bad a fresh outbreak would impact oil markets but could it rival April’s devastation?
Global oil demand plummeted from an average 99.5 million barrels per day (bpd), based on 2019 figures, to just 73.7 million bpd for in April.
That collapse in demand, combined with a persistent supply overhang, caused prices to crash to multi-year lows.
Much of the demand crash came as both international and domestic flights worldwide were canceled as most major economies entered a month or more of lockdown.
It also came from people eschewing their places of employment, at least in most developed countries, and to work from home instead, thereby taking a toll on gasoline demand, which in turn reduced overall oil demand.
Oil prices also plunged to record lows in April, with global oil benchmark Brent crude dipping to the high US dollar teens price point from a high of US$66 per barrel on January 1.
US oil price benchmark, NYMEX-traded West Texas Intermediate (WTI) crude started the year healthy, hitting a robust $63.27 on January 6 but plunged to $11.57 on April 21.
The previous day, prices collapsed on the last day of the WTI May contract to a market-crushing US$-37.63 per barrel. In essence, holders of the contract paid to have the once precious black commodity taken off of their hands, an unprecedented market development.
By May, oil demand started to slowly revive as lockdowns eased and were eventually lifted in many global areas. The WTI crude futures contract for June also recovered from April, hitting $32.50 per barrel, surging over 10% on the last two days of the contract. Brent also rebounded to $37.84 per barrel to close the month of May.
June saw oil prices rebound, riding the crest of an OPEC+ extended oil output deal that removed around 9 million bpd from global markets. Whipsaw price movements saw prices make a remarkable recovery through June, posting their best quarterly performance in 30 years.
Yet, in an often-ignored reality check, both oil benchmarks are still off more than a third since the start of the year and are still well beneath most producers’ break-even points. That’s sending many companies, particularly heavily debt leveraged US shale players, into bankruptcy.
Growth over graves
With spikes in Covid-19 cases being reported in several key global regions, especially in the US, prices are poised to fall again. How much, however, is anybody’s wager at this point.
Much depends on how long Covid-19 infection spikes will continue, whether or not more lockdowns are reimposed, and, most of all, how developments impact road transportation.
The transportation of people and goods makes up around 25% of all global energy consumption, while passenger transportation, in particular light-duty vehicles, accounts for most transportation energy consumption, according to US Energy Information Administration (IEA) data.
Light-duty vehicles alone consume more than all freight modes of transportation, such as heavy trucks, marine and rail. Jet fuel demand also makes up a large percentage of global oil demand, representing around 10% annually, but is still off almost as much as it was during last quarter’s peak in Covid-19 cases.
The current rise in Covid-19 cases won’t likely cause a dreaded April repeat for oil markets, given that most major economies will be reluctant to impose economically crippling full-fledged lockdowns again.
While some governments, particularly several state governments in the US, may tighten measures, the economic stakes are too high for a repeat of earlier lockdowns. In other words, a gruesome but increasingly used phrase “growth over graves” will dictate market trends.
Not surprisingly, there are different projections on how this could play out. Consultancy Rystad Energy said on July 3 that modeling the effect of a wider “second wave” scenario could see global oil demand in 2020 knocked down to 86.5 million bpd, compared to its current base-case estimate of 89 million bpd.
Rystad’s projection still factors in considerable demand destruction that will leave oil inventories bloated, while putting more downward pressure on prices that will leave OPEC+ countries scrambling once again to try to micromanage markets.
“In the second wave scenario, we don’t expect the oil demand impact to be as strong as was seen in the first outbreak, as restrictive measures will be limited to particular regions and sectors,” the consultancy said.
“We would expect these ‘smart lockdowns’ to lower the negative demand impact, so as not to repeat the absolute low of 73.7 million bpd in April.”
Goldman Sachs’ analysts estimated on July 2 that global oil demand would decline by 8% in 2020, rebound by 6% in 2021 and “fully recover” to pre-coronavirus levels by 2022. Over the long term, Goldman’s analysts said they now believe oil demand would not peak before 2030.
Worthy of note, Goldman’s analysis didn’t factor in for recent Covid-19 increases in its projection, nor did it consider a second wave that would more likely strike as traditional flu season and cooler temperatures commence in the Northern Hemisphere in September and October.
The scenario of a second Covid-19 wave in the US during flu season in the cold weather months ahead, however, could send both Rystad’s and Goldman’s projections for oil demand south. Just how bad things could get this autumn in the US and Europe also depends on who you ask.
Some medical experts claim that treating patients with both Covid-19 and seasonal flu at the same time would pose unprecedented problems for not only patients but healthcare systems.
However, science so far offers mixed findings on the issue. Some studies claim that weather plays a negligible role in the spread of diseases like flu and cold, including the coronavirus, while several others claim otherwise.
The Centre for Evidence-based Medicine at Oxford in the United Kingdom said emerging evidence appears to suggest that weather conditions may influence the transmission of the novel coronavirus, with cold and dry conditions apparently boosting the spread.
“This phenomenon may manifest itself through two mechanisms: the stability of the virus and the effect of the weather on the host.”
“The weather effect is minimal, and all estimates are subject to significant biases reinforcing the need for robust public health measures,” the report added.
Until then, markets will have to grapple with the most recent rise in Covid-19 infections, while hoping that infection rates will drop and stronger global oil demand ensues before September and October.