Global oil demand recovery looks uncertain amid a potential second wave of Covid-19 cases

Supply is likely to remain restricted as Opec+ maintains cuts until 2022, analysts say

Thick black oil sits on the pipe work fitting of an oil pumping jack, also known as "nodding donkey" in an oilfield near Almetyevsk, Russia. Oil demand growth is expected to remain tepid long-term if the pandemic’s impact on education and future workforce is also considered. BloombergShow less

The rising number of coronavirus infections are sparking concern over a potential slowdown in global demand growth for oil in the second half of 2020, as countries consider reimposing strict measures to contain a potential second wave of the pandemic.

Oil demand growth has slumped this year due to strict mobility measures in place across the world but measures taken by Opec and its allies to restrict supply shored up prices. Brent was down 0.57 per cent at $45.20 per barrel at 7.39am UAE time, while WTI was down 0.40 per cent at $42.72 per barrel.

The International Energy Agency last week cut demand growth projections for the first time in many months by 140,000 barrels per day, while Opec pared its forecast by 100,000 bpd.

“Demand recovery, especially for the second half of this year will be slower than the first half of this year,” said Zhuwei Wang, lead analyst, Middle East commodity analytics at S&P Global Platts.

He cited the potential for a second outbreak of the virus as a looming concern for oil markets. The coronavirus has infected more than 22 million people as of Tuesday, according to Worldometer, which tracks the pandemic. Around 778,102 have succumbed to the disease so far. Countries that contribute to significantly driving demand growth for oil, such as the US, Brazil, India, Russia and South Africa, have the highest number of infections globally.

Platts Analytics estimates that oil demand will decline by 8.2 million bpd year-on-year in 2020, but will increase again by 6.7m bpd in 2021.

“In 2021 even if we are seeing some kind of demand recovery, the absolute will still be 1.5m bpd lower than 2019,” said Mr Wang.

In comparison, the IEA has forecast an 8.1m bpd slide in demand for 2020, while Opec expects oil demand to grow by 7m bpd in 2021.

Oil demand growth is expected to remain tepid long-term once the pandemic’s impact on education and the future workforce is also considered.

“In the mid-term maybe ... 400 million [fewer] people will enter into the middle class in the next 10 to 20 years and that actually will be translated into a huge amount of demand losses,” Mr Wang said.

"Covid-19 will lead to a lot of young people dropping out of school, [resulting in a] labour force with potential lower wages, leading to lower disposable income and that will all translate into lower demand growth,” he added.

In June, the World Bank estimated a 5.2 per cent contraction in global gross domestic product for 2020 as the pandemic triggers the deepest recession since the Great Depression.

Consultancy Wood Mackenzie also maintains a pessimistic view of oil demand recovery in the near term, citing the continued impact of Covid-19.

“Our H1 2020 outlook anticipates an oil price rebound as demand starts rising post-coronavirus. However, a second large-scale lockdown [across major economies] would deepen the recession, and possibly delay any rebound in GDP until 2022. This would have a significant impact on the oil and gas sectors,” said Dulles Wang, director, Americas gas research at Wood Mackenzie.

The consultancy sees Brent rising to $86 per barrel by 2030 in its base scenario. However, in the event of a second wave, resulting in widespread movement restrictions, the international benchmark is forecast to fall to $70 per barrel over the same period.

Meanwhile, on the supply side, Opec+ producers are continuing to cut back production, albeit in a tapered manner. The group, which is currently slashing 7.7m bpd, is convening its joint ministerial monitoring committee on Wednesday.

The group will "reiterate the strong compliance level” but maintain focus on elevating the level of conformity in an environment where oil demand remains fragile, said Giovanni Staunovo, commodity analyst at UBS.

Opec+ which has Saudi Arabia and Russia at the helm, will receive plans from Iraq, Angola, Kazakhstan and Nigeria on implementing compensatory cuts to make up for their lack of compliance in the second quarter.

UBS expects the markets to be undersupplied for the rest of the year, with Brent reaching $55 per barrel in the first half of 2021. Supply from the US shale basins, however, is unlikely to recover until West Texas Intermediate climbs above the $50 per barrel mark, Mr Staunovo said.