Cuneyt Kazokoglu explains why, despite the damage the worldwide coronavirus shutdown has done to the oil market, crude won’t be killed by the virus. He writes in the FT:
The coronavirus crisis has thrown the oil market out of balance and like other forecasters, we expect an unprecedented contraction in oil demand this year.
But while some are arguing that we have seen the peak in 2019 with consumption never recovering, if anything, the pandemic is likely to significantly delay the structural transformation of the world’s economy away from oil.
Although global consumption will fall this year by 11m barrels a day according to our estimates, or 11 per cent, from last year’s 100m b/d, there are still a series of factors providing underlying support for oil demand growth despite pressure to act against climate change.
Firstly, air travel is likely to recover. Consumption of jet fuel, the oil product worst affected by the pandemic as travel bans and lockdowns take effect, will rebound once people emerge out of isolation. It may just take a few years, but eventually the current concerns will wear off and the strong relationship between rising incomes and travel ambitions will return.
In the meantime, road transport, which accounts for nearly half of global oil consumption, will prove resilient and may even benefit from the crisis. It is likely that people will use public transport less, given subways, buses and trains have been a major — if not the primary — transmission vector for the virus.
Working from home is hardly an option for the majority of the workforce outside of the IT and professional service sectors, where it had already been an established practice among some before this recent crisis.
This means increased reliance on cars once the lockdown measures ease will support petrol demand, potentially for years to come. Early signs of this can already be seen in China, where petrol consumption has nearly recovered to pre-coronavirus levels and many companies are encouraging or even mandating the usage of private cars for commuting, instead of public transport.
Because of elevated levels of household debt, many consumers will postpone buying new cars. As existing vehicles stay on the road for longer, this will slow the rate of fuel economy improvements as old cars are not replaced by newer ones, meaning oil use will remain elevated.
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