BofA - Global Energy Weekly: Learning to LUV oil

• Global Energy Weekly: Learning to LUV oil
• BofA Global Research Media Relations

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Global Energy Weekly

 Global Energy Weekly: Learning to LUV oil
 
•  Gasoline demand has seen a V-shaped recovery on rising mobility while jet fuel is shaped more like an L and diesel like a W
•  This combo leaves us with a U-shaped oil recovery, with demand falling by 10mn b/d YoY in 2020 and rebounding by 8 in 2021
•  We also adjust our best, base, and worst case scenarios for oil demand in 2021 to 101, 98 and 90mn b/d, respectively

A letter for every petroleum product: L, U, V, W

A sharp reduction in global oil output, coupled with the easing of mobility restrictions around the world, has finally halted the recent sharp increases in oil inventories all around the world. Benchmark oil forward curves, including Brent and WTI, have flattened as a result. Yet petroleum stocks remain exceptionally high, so the shape of the demand recovery matters a lot to the future direction of oil prices. Broadly speaking, gasoline has seen a V-shape demand recovery due to rising mobility. Demand has bounced up firmly despite a drop in miles driven, as people feel safe in their cars. Meanwhile, air travel, once deemed the safest mode of transportation per mile traveled, remains grounded. As such, jet fuel consumption is shaped more like an L. And last but not least, diesel burn feels like a W on weak industrial, resources, and mass transit demand, at least in the US.

Net we see oil demand averaging 98mn b/d in 2021

Overall, this combination of Ls, Vs, and Ws leaves us with a U-shaped recovery in total oil consumption. We now see global oil demand contracting by 10 mn b/d YoY in 2020 and then growing by 8mn b/d YoY from a 90mn b/d base in 2021. The quarterly demand swing is much bigger, with demand faltering by 23mn b/d YoY in 2Q20 and rebounding by 21mn b/d in 2Q21. Regionally, we note that the Covid-19 demand crash is different to the one experienced during the Global Financial Crisis in 2008/09, where most of the consumption decline was absorbed by OECD countries and EMs fared a lot better. In contrast, initial data from Europe points to increased work-from-home trends. This shift may protect advanced economies focused on sophisticated service industries such as education, finance, or information technology, but hurt those countries more reliant on tourism and basic industries.

…and we update our best and worst case scenarios

Lastly, we also update the best and worst case demand scenarios for 2021 that we introduced back in March (see The post-corona economy in 2021). In our best case scenario for 2021, we believe consumption could average 101mn b/d next year, while in our worst case scenario we envision oil demand will remain down by 10 mn vs. 2019 levels at 90 mn b/d in 2021. These scenarios embed different key assumptions, including a 5% rise in road traffic demand in our base case on substitution from public to private transport. Our baseline also embeds air traffic staying at 50% below normal activity. In our best case scenario air traffic recovers to normal levels, mostly due to a virus cure/vaccine and a strong recovery in consumer confidence. And in our worst case scenario, road traffic drops again to only 90% of the normal due to a significant second Covid-19 wave and rolling regional or country-wide lockdowns.