Global energy sector leader Jan Egil Brændeland on the pandemic’s impact on global oil demand and how e-commerce is an unlikely saviour.
Global energy sector leader Jan Egil Brændeland on the fluctuation in oil demand and how e-commerce is proving to be an unexpected lifeline.
The unprecedented impact of the prolonged global pandemic has hit oil demand and prices hard. But while prices have plunged to extreme depths and demand has fallen, there is increasing evidence that e-commerce is shoring up the industry as it transitions to a world demanding renewables.
While tourism has halted, holiday flights grounded and theatres and restaurants closed, people all around the world with disposable income have been spending online. This has caused a surge in demand for delivery fleets and a corresponding boost in global demand for aviation and motor fuel.
How has oil demand and price been affected by COVID-19?
Let’s recap where oil exporting countries stand as we head towards the end of this difficult year. The combination of the collapse of the oil market earlier in the year with the global economic contraction is challenging in the extreme.
In April 2020, the Western Texas Intermediate (the accepted benchmark price for US crude oil) went negative for the first time ever. The International Energy Agency (IEA) says that oil revenues for key producers will likely fall by up to 85% in 2020 compared directly with 2019. However, the fall could be even worse depending on market developments over the final weeks of the year.
However, this price crisis within the oil and gas industry is part of the much wider picture. The decline in the traditional market for fossil fuels is underlined by a slow but sure commitment towards decarbonisation by some countries. In addition, the digitisation and technological changes occurring at every level are making renewables the preferred option for energy.
In simple terms, the already existent volatility of the oil and gas market has been thrown into stark relief by COVID-19. The downside of the world’s high level of dependence on non-renewable resources has been accentuated by the pandemic.
Long-running oil market volatility further impacted by decarbonisation
The global oil demand has been volatile since the 1970s, following the introduction of futures trading. This brought about more speculation in the market, further contributed to by more demand for oil in developing countries, and new production in the United States.
But COVID-19 has pushed global oil prices to a shocking new low. Prices have recovered since the abrupt fall in April this year, but it is increasingly unlikely that we will witness a recovery like we did following the global recession in 2008.
Renewable energy prices are decreasing significantly, more Governments are cementing their commitment to decarbonisation and technological advances are changing the world’s understanding of what’s necessary for a sustainable future. As the world transitions to a post-COVID future and to one with cleaner energy, oil prices may not fully recover to what we saw before the pandemic.
The fluctuations in global oil demand in 2020
Economic disruptions due to COVID-19 have met a marked slowdown in oil production and movement around the world. In turn, this has produced a drop in global oil demand. In April, demand for oil was down by 30%, which is a low last seen in 1995.
Oil producers then faced storage issues, with crude oil stocks reaching a record-breaking high by June 2020. Subsequent cuts in oil production has taken the pressure of the lack of storage capacity. For those developing countries that are almost entirely dependent on oil, the impact of the fall in prices is affecting their response to the pandemic. And this is at, of course, a time when money is needed more than ever to tackle the health and economic pressures.
How much oil prices will affect economies will depend on the export concentration for each one, as well as how much it costs to produce oil there. For example, places like Saudi Arabia can produce oil cheaply, while others such as Nigeria deal with production costs that are almost twice as high. The latter countries may have to discontinue oil production, while low cost producers will probably still be able to keep going even allowing for decarbonisation.
How is e-commerce helping to boost oil demand?
Under these extremely challenging circumstances, the immediate future for oil production may seem uncertain. But a silver lining of the pandemic ? the increase in ecommerce ? offers the lifeline I mentioned earlier.
For example, since lockdowns and COVID-19 measures began (at least in some states) in March 2020, freight profits and traffic have increased significantly. According to the US Federal Highway Administration (FHA), the average HGV is driving 5% further per month compared with 2019.
UPS and FedEx have had to implement limits for the upcoming festive delivery season due to the extremely high demand. DHL is also preparing for a massive surge in demand, fuelled by online shopping
And for the oil market, this increase in demand for global freight is holding demand together as we approach the end of the year. Trucks delivering freight accounts for approximately 50% of global demand for diesel and around 16% of global oil consumption. A further boost for freight has come from businesses all around the world rushing to restore supply chain inventories that were completely disrupted in Q2 2020.
However, crude oil is still hovering at around $40 per barrel and while broader market demand has been rising, second waves of COVID-19 are threatening this tentative recovery. But as we head towards Christmas, highways will continue to be busy with HGVs delivering goods of all kinds.
