Oil recovery shows demand is still on a rising trend

The Great Influenza of 1918-19 was one of the greatest disasters of the 20^th century, estimated to have killed more than 50 million people. But it ended relatively quickly, hitting in three waves between the spring of 1918 and the spring of 2019. It has been 21 months since the Covid-19 virus was first identified in January 2020, and the worldwide death rate is still higher than it was for most of last year.

But although the pandemic is still with us, its impact on the world economy and on energy demand is fading. Resurgent demand has been a key factor in the record high gas and coal prices recorded in Europe and Asia in recent weeks. For oil, too, demand has been rebounding. World oil consumption ran at about 97 million barrels per day in the third quarter of 2021, up 6% from the same quarter of 2020, and Wood Mackenzie expects it to rise again to about 99 million b/d in the fourth quarter. That demand growth, coupled with the OPEC+ group’s decision to stick to its previously agreed scheduled for increasing supply, has driven prices higher, leaving Brent crude at about $82 a barrel on Thursday and WTI at about $78.

The recovery is expected to continue. By the third quarter of 2022, Wood Mackenzie projects, world oil demand will be back to pre-pandemic levels. The pace of the recovery across products and across countries is still uneven, however, as a recent Wood Mackenzie insight explained. Countries where vaccination rates are relatively high and fatalities have dropped sharply are generally seeing stronger recoveries than lower-income countries that face greater difficulties in protecting their populations.

In the US, petroleum product demand over the summer has been approaching its all-time highs at about 21 million b/d. Gasoline consumption since July has been only about 2% below its 2019 level. Mobility data show that even as the Delta variant of Covid-19 caused a surge in US infections, people kept driving. The bars here are daily new Covid-19 cases, the line is Apple’s driving mobility indicator, based on requests for directions on its Maps app.

While many office workers are not back to five days a week of 9-to-5, they are still moving: for shopping, for leisure, doing the school run. Air travel has been slower to recover, but it too has been rebounding. In the four weeks to October 1, US jet fuel demand of almost 1.5 million b/d was only 14% lower than in the equivalent period of 2019, according to the US Energy Information Administration. It was up 64% from the same period of 2020.

Along with the US, the EU, Japan and almost all OECD countries, as well as most of Latin America, the Middle East and Russia, are not reverting to lockdowns and their demand recovery is continuing, says Suzanne Danforth, Wood Mackenzie’s Americas markets lead for downstream oil. But in much of Asia, countries are still imposing intermittent lockdowns to counter flare-ups in cases, and their demand recovery is more uneven.

Since April, Wood Mackenzie’s projection of oil demand has been revised up slightly for North America, but revised down for the Asia-Pacific region. The recovery in jet fuel demand, for example, has been much slower in southeast Asia than in the US.

As the Covid-19 vaccines continue to roll out around the world, however, the pressure for these intermittent lockdowns is likely to decline, and the countries that have had slower demand recoveries than the US can be expected to catch up, Danforth says. The rebound in high-income countries with high vaccination rates is giving an indication of what other countries can look forward to.

When the impact of the pandemic on world oil  markets was at its height, there was talk that we had already passed the point of “peak demand”, and consumption would never again be higher than it was in 2019. Wood Mackenzie analysts did not believe it at the time, and their scepticism is being vindicated. Peak demand will come only through long-term structural changes, most immediately in light road transport, and those take time. There are signs that the surge in EV sales in Europe may be starting to chip away at road fuel demand there, but most of the world is not there yet. As the impact of the pandemic continues to fade, that is likely to become increasingly apparent.

A call for the US to curb energy exports

As gas prices have soared in Europe and Asia, the impact in the US has been muted. Benchmark Henry Hub gas rose briefly above $6.40 per million British Thermal Units this week, its highest level since 2008. But that is still well below the peak prices reached in the UK: for a time this week, they were equivalent to more than $40 per mmBTU.

Even so, gas buyers in the US have been looking nervously at rising domestic prices. The Industrial Energy Consumers of America, a group that has long argued for restraint on US LNG exports, last month urged Jennifer Granholm, the energy secretary, to take immediate action to curb international sales of US gas. The group urged the Biden administration to “reduce export rates” for US LNG until gas inventories were back at five-year average levels, and to put a hold on all pending approvals for new export facilities pending a review of whether the projects are “in the public interest”.

The administration has given no indication that it is preparing to respond to those calls. But speaking to a Financial Times conference this week, Secretary Granholm said the administration was looking at gas prices in the US and internationally, “to make sure that we’re doing all we can both here and in Europe to make sure people have the supplies they need”.

With gasoline prices threatening to rise up the political agenda, the administration also has the option of reimposing restrictions on crude exports, which were lifted in 2015. The consensus view of that move has been that it has not raised the cost of fuel for US consumers. Petroleum product sales were unrestricted, so US and international prices were closely correlated, and the only significant impact of the restrictions was to create occasional  distortions in the market when there was a mismatch between crude production and refining capacity. Secretary Granholm suggested that a return of those restrictions was unlikely, saying: “All tools are on the table, but some are more readily available than others.”

She seemed more open to the idea of releasing more oil from the US Strategic Petroleum Reserve, saying that was “a tool that’s under consideration”.

In brief

With Europe facing what Wood Mackenzie analysts have warned could be “a winter like no other”, President Vladimir Putin of Russia this week offered some potential relief. His government would “think through the potential increase of supply on the market,” he said, adding that Russia “has always been and is a reliable supplier of gas to its consumers all over the world,” with no interest in encouraging the “speculative frenzy” in world markets. Alexander Novak, Russia’s deputy prime minister and former energy minister, said rapid certification to allow gas to flow through the new Nord Stream 2 pipeline “could somewhat cool off the current situation”.

While the supply crunch for gas, coal and power has hit many countries around the world, Britain has had its own individual supply crisis for road fuels, with panic buying leaving filling stations empty. New government data showing the rate of deliveries to stations have shown how in a finely balanced system, just a small drop-off in supply and increase in demand, amplified by news reports and social media, can lead to collapse. Fuel deliveries dropped by just 200 litres per station on average, the i newspaper reported, while demand also rose very slightly. But as reports of panic buying started to circulate, demand soared, rising by 80% on Friday September 24, and suppliers were unable to keep up.

Britain’s switch at the beginning of September to E10 fuel, containing 10% ethanol, may also have played a part, according to two academics at Nottingham university. Because ethanol has a lower energy content than gasoline, the E10 blend delivers slightly fewer miles per gallon, meaning that drivers will have to fill up slightly more frequently. Meanwhile, retailers faced extra complexities in managing their inventories. Taken together, these factors could have been an additional nudge that tipped the system into crisis, the academics say.

Tesla is relocating its headquarters from Palo Alto, California to Austin, Texas. The company is building its Gigafactory Texas near Austin, and founder Elon Musk said he moved to Texas last year.

And finally: a home decorating tip for a warming world. It has been known for millennia that painting houses white helps keep them cool, because white objects absorb less heat. Painting roofs white looks like a cost-effective way to reduce surface temperatures, saving lives in extreme heatwaves and reducing power demand for air-conditioning. Now scientists at Purdue university in Indiana have developed what has been described as “the world’s whitest paint”, designed to maximise its cooling effect. The formulation can reflect 98.1% of sunlight, compared to a typical maximum of 90% for white paints on the market today. A roof area of about 1,000 square feet covered with the paint could deliver about 10 kilowatts of cooling power, the scientists say.

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Matthew Yglesias — The case for more energy

Susan Arterian — The backyard battle for New York’s climate future

Dagomar Degroot — Our planet is not doomed. That means we can, and must, act

Anjani Trivedi — No-one seems to care that EVs are catching fire

Quote of the week

"You see what’s going on in Europe, the hysteria and that mess on the markets. Why? Simply because nobody takes it seriously. Some speculate on the issue of climate change, while someone else underestimates something, and yet another one starts cutting back investments in the extractive industries. There needs to be a smooth transition… We are witnessing the result of some unbalanced decisions, unbalanced development and dramatic ups and downs. The European energy market clearly demonstrates this." — President Vladimir Putin of Russia, as quoted by the Tass news agency, told a cabinet meeting that the turmoil in European energy markets showed the pitfalls that should be avoided in the transition to lower-carbon energy.

Chart of the week

This comes from Wood Mackenzie’s latest Global Energy Storage Outlook, led by Le Xu, a senior analyst in our energy transition practice. It shows the rapid pace of growth in energy storage expected over the coming decade, and also underlines that just two countries are set to dominate the market: the US and China. In 2030, the US and China are between them expected to account for 73% of all installed energy storage capacity worldwide, with the rest of the world combined representing just 27%.