Global oil demand gradually declining

Author : Andriy Danyliuk

Source : Foreign Policy

The overall indicator of global demand for oil as a raw material will reach the lowest level in barrels per day by the end of this year
23:24, 29 September 2020

Yegor Aleyev/Tass

As numerous experts note, slowly but surely the era of constant demand for oil and oil products has come to an end. At present, another catastrophic drop in the level of oil demand is predicted. It will start already this year, after which it will be possible to observe it for the entire next 2021. What is the reason?

It is noted that the overall indicator of global demand for oil as a raw material will reach the lowest level in barrels per day by the end of this year. The reason for this situation, oddly enough, was the emergence and rapid development of the coronavirus Covid-19 at the end of 2019 - 2020. Oil reserves began to grow in the storage facilities, which is associated with a decrease in its demand, and every day, week, the reserves are increasing. The entire sphere of oil production will also suffer. It is forced to reduce its production capacity, which will lead to a disruption in the economy of a number of states, a reduction in numerous jobs, a fall in GDP and, in the future, to default in a number of countries.

The first fluctuations in the oil market began in March this year. This was due to the fact that the participants in the emergency meeting of OPEC were unable, to come to a common decision and agreement after lengthy debates. The result was not long in coming; in fact, oil prices immediately fell by about 30%, which caused significant fluctuations in the market. In May, nevertheless, a decision was reached - the countries participating in the agreement, during an OPEC briefing agreed to jointly reduce oil production within 9.7 million barrels per day. This regulation was in effect from May to June 2020. In the second half of 2020, this figure has already reached 7.7 million barrels. In the future, it is planned to reduce production within 5.8 million barrels per day until the very end of April 2022. As soon as the desired indicator is reached, the price of oil, according to analysts, will begin to rise again. The most affected are the states, which economies are basically focused on the production and sale of oil.

The oil market continues to cultivate fears of insufficient demand and oversupply. The US Department of Energy said that gasoline consumption in the US fell last week to 8.78 million barrels per day from 9.16 million barrels a week earlier. Labor Day, traditionally celebrated on the first Monday in September, completes the high summer fuel consumption season. In autumn, the enterprises of the Northern Hemisphere will also carry out preventive work, rebuilding production to a winter mode. Accordingly, the market fears that a surplus of supply may form again in September-October. Iraq has denied information that it was negotiating the lifting of production restrictions in the first quarter of 2021, but there were enough rumors to admit weak motivation to fulfill obligations in OPEC +.

The oil and gas industry is experiencing its third price collapse in 12 years. After the first two shocks, it recovered, and the business returned to its usual course. Things are different now. The shock on the supply side is compounded by an unprecedented drop in demand and the global humanitarian crisis. In addition, the financial and structural resilience of the industry is much weaker than in past crises. Shale exploitation, oversupply, and the generosity of financial markets that did not pay enough attention to the discipline of financing contributed to the decline in profitability. Today, with prices hitting a thirty-year low and public pressure mounting, leaders are realizing that change is inevitable. The Covid-19 crisis has greatly amplified trends that began before the pandemic and is driving the industry into one of the largest transformations in its history.

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OPEC has published a forecast for oil demand, according to which this year it will decrease by 9.5 million barrels per day. In 2021, global oil demand is projected to grow by 6.6 million barrels per day - this will not cover production cuts in 2020.

Meanwhile, British oil company BP, warns that oil demand, which has eased during the coronavirus pandemic, may not recover in the next 30 years.

Oil demand will continue to fall over the next 30 years, according to a recent study by BP. The company explains the decline in oil demand by the development of alternative energy sources, for example, public transport is gradually becoming electrified.

Renewable energy, primarily wind and solar, will be the fastest growing energy sources in the next 30 years, given the rapid development and investment in these areas, BP experts predict.

At the same time, some economists and oilmen are confident that the drop in oil demand is only a temporary phenomenon, and after the crisis caused by the pandemic, the situation should improve.

Despite the steady growth in the number of electric vehicles in the global vehicle fleet, the demand for oil will continue to grow as the world's population increases. This is especially true in poorer countries, where the use of electric vehicles can be limited for reasons of economy and low environmental standards, said economic analyst Stephen Cole.

It is not possible to accurately determine the depth and duration of this crisis, but research by McKinsey experts shows that without fundamental changes in the industry, it will be difficult to return to the attractive indicators that have characterized it in the past.

Investors are increasingly questioning whether today's oil and gas companies will ever be able to deliver acceptable returns. At the same time, the role of these companies in the transition to new energy also remains in question. They will have to prove their ability to take control of the situation. Financial discipline, capital allocation, risk management and corporate governance will be critical issues.

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