Flattening the Curve
Despite concerns that demand destruction from the coronavirus pandemic will curtail the historic OPEC+ cut of nearly 10 mb/d, I would like to stress that the deal’s duration is meaningful, particularly given the tapering clause lasting through early 2022. I also believe the cartel’s action should help avoid the worst-case scenario of peak global storage congestion, a problem that could have had far longer-term consequences. Real time satellite imaging data measuring global floating roof tank storage show global stocks built by nearly 195 mb since March 1st, with China stockpiling and contributing to nearly 25% of the global builds during that span as its economy recovers.
Demand Destruction – Driving the Bus
Although other regions have also seemingly begun the process of flattening the COVID curve, real time tracking of indicators of human activity (vehicle traffic to port data and flight tracking) show no material pick up in oil demand. We estimate there is currently nearly 7.6 mb/d of US gasoline demand loss, and 15 mb/d globally. As US gasoline represents 10% of global oil demand, there will not be a significant price rally unless it picks up. As for global jet fuel demand, it has hit rock bottom in both Europe and the Middle East, with flight activity down 91% and 84% of Asian flights cancelled. In the US (25% of global jet fuel demand) 71% of total flights have been cancelled. We believe that nearly 4.1 mb of global jet fuel demand is currently being destroyed, daily.
The Road to Normalcy
I expect a staggered return to normalcy, with diesel demand likely to be the product quickest to bounce back as governments enact stimulus plans to revive their economies, as we’re seeing in China now. While unlikely to grow at a pace firmer than prior to COVID, we anticipate that gasoline demand will rebound sharply back near normal levels as the economy re-opens. Jet fuel demand is the least predictable in terms of pace of recovery, but will almost certainly be the laggard of the group. It is difficult to predict when discretionary air travel will return to normal levels, but from an oil demand perspective, at 6.8 mb/d, global jet fuel demand is the smallest of the three products by a substantial margin. In other words, the rebound in aviation fuel demand will lag the complex and remains the largest question mark, but it also has the smallest footprint of the group.
