Second-wave COVID fears trigger rethink on oil demand recovery

Growing fears over a resurgence in COVID-19 cases are putting the world's oil demand recovery on hold, tempering oil price gains and sparking concerns over a new supply glut in the coming months, according to analysts.

Coronavirus infection rates are rising in some of the world's biggest oil-consuming countries as they battle to contain new flare-ups with a second-wave of quarantine measures.

The US, India and Brazil, which combined consume more than a quarter of the world's oil, continue to post the biggest number of new daily cases and make up almost two-thirds of the global tally. Efforts to keep infection rates in check elsewhere are also struggling and in Japan, the world's fourth-biggest oil user, a spike in infections has triggered new lockdown fears.

As a result, oil market watchers are revisiting their demand forecasts, most of which had previously predicted that oil demand would recover from an April nadir of around 80 million b/d sometime during 2021.

This week, Goldman Sachs forecast that the pace of monthly demand gains is set to slow to below 1 million b/d from August through December, after surging 12.5 million b/d from April to July.

"This slowdown is driven by a sharp stalling in the US due to the resurgence of the virus, an only small increase in global jet demand and finally the headwinds to normalizing activity even in countries where the virus remains under control," Goldman said in a note.

By year-end, Goldman sees global demand at 96.3 million b/d, still down 6 million b/d, or 6%, on its pre-COVID expectations.

Citing rising second-wave infections, Rystad Energy last week changed its base case scenario for oil demand saying it now sees global oil demand unlikely to recover to 2019 levels before the end of 2022.

The Norwegian consultants see global oil demand staying relatively flat from July to October 2020 and then rising at a much slower rate than previously estimated. Rystad's base case scenario now shows global oil demand averaging 89.7 million b/d in 2020 and 97.1 million b/d in 2021, compared to more than 99 million b/d in 2019.

Weakening mobility data

A major source of the rising pessimism on demand comes from global mobility indicators which have shown that the recovery from April lows largely came to a halt in early July.

According to data from Google, activity has weakened in workplaces, retail and recreational sites, and transport hubs in most of the world's biggest oil consumers.

In the US, the worst-hit nation in the world, Google data show evidence of a July slowdown in economic mobility which dipped to 25% below pre-crisis levels last week. Indeed, broader US economic activity continued to move sideways last week, according to investment bank Jefferies, and has shown no growth since mid-June.

In Japan, mobility slumped to the lowest since early June last week, according to Google data, after a recent surge in infections raised fears that the country will reimpose a state of emergency.

In Europe, efforts to curb new infections through contact tracing and localized shutdowns are struggling. Madrid has made face masks mandatory in public spaces, Belgium has tightened social distancing rules, and the UK has imposed a two-week quarantine on travelers from Spain where infections are rising.

New supply glut potential

Real-time road traffic indicators suggest gasoline and diesel demand are also flattening out, stalling the recovery of two of the worst-hit fuels by the crisis.

Europe's traffic congestion levels are still well below post-lockdown highs during June in most of the region's top capital cities, according to the latest TomTom data.

Although congestion in Berlin recovered to 12% below year-ago levels last week from 18% a week earlier, traffic is still down after recovering to year-ago levels in late June. Congestion has fallen to the lowest levels since early June in Paris and Rome while traffic in Madrid has retreated to mid-June levels.

"[The scale of] the European downside will properly manifest in the rest of the summer," Rystad's head of oil markets Bjornar Tonhaugen said. "These numbers from the 'example continent' may be very important to predict how the situation may develop globally...Under these circumstances the demand recovery that the market hoped for is at least muted."

Energy analysts Wood Mackenzie, which estimates an 8 million b/d oil demand slump in 2020 from pre-crisis forecasts, said "downside risks from the deep GDP contraction and rising cases still remain."

A softer demand outlook, together with 2 million b/d of supply due to return to the market from OPEC+ in a few days, is weakening the near-term market balance and capping oil price gains.

"[Recent oil price gains] may be canceled as soon as production exceeds demand, which is around the corner, and as this is expected to last for some time, traders will race to price it in," Tonhaugen said in a note.

At the end of June, S&P Global Analytics lowered its 2021 oil demand estimate by 369,000 b/d to 101.2 million b/d, citing increasing concerns of new or second-wave COVID-19 cases.

Global oil demand will shrink by 8.2 million b/d this year to average 94.3 million b/d, according to the latest estimates from Platts Analytics.

Under a second-wave pandemic scenario, however, Platts Analytics sees oil demand falling by 10.5 million b/d this year and will only approach the base-case scenario by year-end if a vaccine is widely available.