Oil faces new “normal”

Ample supply, full inventories and subdued demand are likely to pressure oil prices well into 2021, says Rystad Energy’s Paola Rodriguez-Masiu. 

Listen to this week’s pod discuss a potential return pre-Coronavirus market conditions and what the new “normal” will look like, since changing consumer habits, increased electrification and a reduction in commuter and air travel in the wake of the Covid-19 pandemic could actually accelerate the demise of oil. 

Host: 

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest: 

• Paola Rodriguez-Masiu, senior analyst, Rystad Energy. 

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:31

Hello listeners and welcome to the Montel Weekly Podcast, bring You Energy Matters in an informal setting. This week's pod returns to the old market, the most global and most traded energy commodity. Prices crashed to $15 a barrel at the peak of the COVID-19 pandemic in April, but have since recovered to about $45 a barrel. My name is Richard Sverrisson, and here to help us understand current market dynamics and the outlook going forward is Paolo Rodriguez Masiu, whose senior analyst at Rystad Energy. A warm welcome to you, Paola.

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 1:06

Yeah, hi. Hello Richard. Thanks for having me.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:09

No worries. You're, it's always good to talk. Oil at the old markets is a big driver of. The whole energy complex. So I think we just jump straight into it and discuss what's happening in the market at the moment. So prices for Brent crude are hovering around $46 a barrel, near, near level, seen in early March. What are the main drivers at the moment? Is it all COVID, 19 and opec?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 1:31

Yeah. At the moment a lot of things are happening in the market. They have never been a more exciting time to win. An analyst. On the one hand you have the carbonating crisis, which took down about 30% of the entire world's oil demand. And on the other hand, you have OPEC failing first to put together an A to control the output, just to then meet once again. Once the culminating crisis just struck to managing to perform the biggest balancing act ever seen by the all markets taken out. The market about 10 million barrels per day of supply and most recently, right now, you also have the threat of a double hurricane heating the UF Gulf Coast infrastructure, both production and also refineries. On the last days, one of the hurricanes was actually downgraded to. Tropicals, but you still have Lara, which is just gaining strains and is just heading towards the heart of the US Gulf Coast Refinery infrastructure. And this is have injected a zone of steam to the markets. Previously the old prices were just. Stock on the meat,$40 per barrel range. And right now due to the storm that have injected some steam to the prices again and managed the prices to increase a little bit.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:54

So the storms then have shut in about what a hun, 1.5 million barrels a day or 14% of US crude production is. How long do you expect this to. Continue to have an impact on the oil market.

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 3:06

Yeah, we expect that the production choke downs are gonna last for about two weeks because we don't expect that the operators are going to be able to bring back the personnel between the storms. But the production side of the effects on the production side, the production curtailments are likely gonna be offset by the demand side being knocked down because it's not only that this hurricane is gonna affect production, but it's also going to hit demand as it's prompting the refineries in the US coast to shut down their facilities.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:46

Do you then. Expect prices to inch up towards 50, or what are your price expectations here?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 3:53

Yeah, to be honest, we don't expect prices to move too much. I think the price are really storm born, locked on the mid $40 per barrel range because at the moment, traders are being very cautious because at the same time that you have this hurricane. Which normally would have been a positive shock to prices. You have deal, the threat of the COVID-19 crisis and also the man falling because of this threat and the number of cases spiking. So we basically see that traders are just being very cautious at the moment on the way they react to any external show.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:35

I think we return to a lot of these factors, Paula, but what would it take for oil prices to break out of this kind of mid forties range, both on the upside and the downside?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 4:45

What it will take for oil prices to increase at the moment is to get rid of all the inventory that we have been building things late march. Basically right now, both crude and also products, inventories are at historical high levels in pretty much all the regions. They have been decreasing during June and during July, thanks to the efforts of OPEC Plus and also due to the United States shutting down a lot of production for economical reasons. But inventories are still are historical high levels, and if we actually wanna see any material recovery in the old prices, we'll have to deplete all the stories that we have right now.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:28

And how likely is that?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 5:30

At the moment, it's not very likely because we've seen that the demand recovery have run out of team. So right now, the demand or the oil demand, the global oil demand have recovered for the bottom. It reached during April, 2020. But we don't see demand really recovering forward. I think that we are already in the new normal for the next two years, and the demand growth will be quite limited. And the demand growth is also threatened by the possibility of a second wave on COVID, 19 cases that will cause the demand even go lower. So for the next year. Year. We don't really expect to see any big drop in the storage levels. And we actually see that prices are gonna start recovery somewhere on the, by the end of 21 and the beginning of 22,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:24

For a good year. Then we are still seeing very low prices then. It's what you're saying here, Paula, is we're not outta the woods yet in terms of demand recovery.

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 6:32

We are not out of the woods. Yet the prices that we are seeing right now on the meat 40 per hour range are the prices that we expect to see for the next age year or so.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:43

Okay. So it's interesting 'cause I think obviously a vaccine is also for the COVID-19 virus is a key factor here, but'cause some would say maybe the 21 prices are low and maybe some participants could buy these contracts at a bargain. What would you say to that kind of view?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 7:01

Yeah. I don't think that it's only the vaccine and the possibility of having a vaccine soon, but it's also the behavioral changes that COVID-19 have introduced on the structure of the oil demand. You basically have people that have been locked down and working from home for a very long time, and a lot of those people are very happy to go back. To their offices. Offices, but many others will gladly give away their daily commune on exchange to more flexibility and mean allowed to work from home. And the same with the aviation sector. I don't. Expect a lot of the business travels to come back anytime soon. First, because people are adapting very quickly to the new technologies and to via conferences and so on. And second, because you have also an economical pressure to business travels are expensive and as company have had a very hard period, it's very unlikely that they want. They will want their employees to go back to the same level of traveling any time zone.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:06

Absolutely. This raised the question of are we going back to normal and what is the new normal that we're going into? Yeah. What is the

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 8:12

new normal? Yeah, exactly. That,

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:13

that's, that begs the question, I think, 'cause we see that second quarter economic figures would bleak across the globe and there may be a risk that the second half of this year won't see much of a recovery. And do you think then. All demand will remain weak until trade and economic indicators return to sort of normal levels in quotation marks and travel restrictions are lifted. Or the other side of it can we even talk of return to normal amid the change in consumer habits and the drive to green the economy. As you mentioned,

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 8:45

we don't expect a material increase on demand on the fourth quarter of the year compared to the third quarter of the year. So we believe that demand will stay more or less constant and even decline if the threats of a second wave become a reality and we don't see demand levels coming back to precor levels coming back to 2018 levels well into the second half of the 21. So we are talking about one year or one year and a half from now, when we actually will start to see that the demand, the global all demand, will be completely out of the wolves.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:25

It's also then we can talk more mid to long term because for example, Japan, it used to be a huge oil importer. But this year, the imports of oil are likely to be the lowest for 50 years. So it's different in a way to other markets. But you see a trend here. The COVID-19 shock, the growth of alternative transport and a decline of air travel. Is, would that be a fair assessment? Paula? Yes.

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 9:47

I think that's actually a very good point, because in many ways, COVID-19 give you already an idea of what the future for the oil demand might look like. So COVID-19 mostly impacted the transportation sector, so it impacted the ability of people to move around and therefore it impacted all the fuels used in the transportation sector. Going forward, after we have a new means or new technologies for the transportation sector, then you could really see what happened. Total oil demand without the transportation sector, or we losing that part of the transportation sector. Let's remember that the transportation sector makes up about 60% of the total liquids, oil demand, and the passenger vehicles are about 30%. So of the electrification of vehicle increases, most of the all companies are at a threat, a very significant threats of losing a big chunk. Oil demand.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:52

When is that likely to happen in three years, five years, 10 years, two years even?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 10:56

Yeah, that is actually the big question. Like I always like to say to our clients that the energy transition have moved from being a big if to being now a win. Very few people now question whether or not we're gonna have the transition. And the big question is now actually, when is that gonna happen? In's opinion. The transition is the energy transition and therefore the peak oil demand. Happen within this decade, so before 2030 and perhaps COVID-19 would accelerate that peak oil demand in that transition.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 11:35

Fascinating stuff. I think, when we are looking at the energy market of the future, but if I can re return to oil market dynamics power, and look more on the supply side. So you mentioned that the opec and its allies, including Russia, have begun tapering their production cuts. So potentially you could say, see more production coming to the market as demand maybe picks up a little bit. Can we expect to see more easing in production cuts or do you expect things to stay more or less the same?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 12:04

Yes, that's a major threat. So right now in our base case scenario, we'd actually find that the oil market is gonna start to balance by the second quarter of 2021. But this is considering in our base case that o. Will stick to the current quotas, but as you correctly say so as the demand starts to come back, there is an imminent risk that countries will start to pump more crude than their quotas actually manage. And we already saw this before in April. Or when the OPEC plus deal just broke down and countries just starting to pump at historical levels screwed oil because they cool and agree on production cuts. And this could happen again as we move forward in 21. And if, of course, a very serious threat because by that time, by 21. Or most of the countries in the PEC Plus all will have been suffer from two major or two sin at the same time. The first one is the lower all prices, but at the same time lower volumes. Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:18

A double whammy for them, if you like Paula. Exactly. Yeah. Yeah. For example, if we turn to other producers, what's your assessment? What's happening in Libya at the moment, and what impact is that happening on, on, on the oil market?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 13:28

Yeah. Libya right now is a big wild car for the markets because if the civil undress right now going on Olivia comes to a resolution and they successfully managed to reach. An agreement Livia have the potential to bring back to the market 1.2 million barrels per day. So this is huge, especially considering how the press demand is at the moment. So this 1.2 million barrels per day will be trouble for pec, especially considering that Livia is in from the supply codes.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:05

What about in the United States, we could see, the oil rig count is increasing slightly. What, what's happening here?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 14:12

Yeah. In the United States, we see what is happening right now is a bit different because we expect that production, of course, is going to decrease for the next two weeks because you have about 1.5 million barrel that were shot. Gulf of Mexico, but this will be something temporal. Those volumes will come back before the end of September. And when these volumes come back, we see US production ramping up. We estimate that most of the volumes that were shot in during the height of the COVID-19 crisis, we'd already come back during August. Most of those volumes actually already are back. But what's happening is that the United States have a very particular, let's call it production structure. They have a very high base decline. So even with all the volumes that were shown in coming back, the fact that they were not drilling during the last month of not drilling as much during the last month means that they won't be able to compensate the huge base decline that they have. So as a consequence, even if the drilling starts, even if the shot in wells come back the United States production won't go back to pre COVID-19 levels anytime soon. Or at least not in the next two years.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:33

Yeah, I know, of course you have an additional world card here, Paolo, which is the election in November in the United States. Could that also impact some of the aspects which you've been talking about, about the production of oil and fossil fuels? To be

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 15:46

honest, we don't expect that the election, we have a significant impact. On the production of the United States, let's remember that the chair's revolution happened under the Democrats Watch. So having a Democrat or having a Republican will not ultimately really change what is going on in the oil industry in the United States. Of course, Donald Trump have given to the industry tax rebates, a 14% tax rebate that will of call helps some companies. Going forward, and if Biden election. Have such a big impact on the final destiny or final outcome of the American oil industry?

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:40

Absolutely. Maybe potentially a Biden victory could impact the, or could accelerate the electrification of certain parts of the US economy. But in, in terms of the oil market, you're saying it's, it'll be pretty much business as usual on, on, on if either Biden or Trump win, then, if that's, if I understand you correctly, bola

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 16:56

Yes, exactly. To power. Then of course they have the target of the rendering United States carbon neutral by of. The adoption of new technologies, but this will be happening anyways with or without really the support of Biden. It might accelerate it, but it'll not ultimately or meaningfully change it. Let's remember that right now, Texas, the hometown of oil, actually have the biggest electrical installation of wind and solar power in the United States. The biggest production of WIN come actually from Texas. And this is happening under Republican, under Trump, we don't really see a meaningful change. It perhaps will be accelerated, but the changes won't be really meaningful

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:51

if we switch to geopolitics sticking with the US partly. So the US and China resumed talks on the phase one trade deal. No. How likely is a trade deal and what impact would such an agreement between the world's biggest oil consumers have on the global oil market?

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 18:08

Yeah, this is a really difficult question that you're asking me right now. Sorry about, that's the D put you on the spot a bit. Sorry.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:14

That's really the

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 18:15

difficult one because, the trade war, it hasn't been really beneficial for none of the parties involved. You cannot really call a real winner in this trade war. And before the elections, you could argue that Donald Trump have a real incentive to try to reach a deal with China. Of course you have the incentive to try to reach a really good deal with China and whether or not that will happen is very complicated to actually forecast. Very complicated to foresee. There is a lot of tensions right now going on between the two countries right now. You really see a commitment from the China side. They are really initiative that they actually want this deal to, to be filled. They are increasing the energy import from the United States on the CR side that almost doubling in September compared to August levels. So they have a real incentive or they're showing clear signs that they have an incentive to reach a deal, but also. COVID-19 have make it really difficult for China to fulfill the commitments that they have acquired. It is very unlikely that China would actually manage to fulfill all the targets from from buying commodities from the United States because, basically the COVID-19 is putting a stop on on a lot of the imports that, that China has.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 19:46

So yeah, there's a lot of factors at play here. Paula, thank you very much for a great overview of the drivers, both local and global in the oil market as it currently stands in the current developments there. So thank you very much, Paula.

Paola Rodriguez-Masiu, senior analyst, Rystad Energy: 19:59

Yes, you're welcome. Thank you very much for having me.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 20:02

So listeners, that's about all from the Monte Weekly podcast this week. Remember to keep up to date with all our stories on Monte News and follow us on Twitter, LinkedIn, and subscribe on Apple Podcast, Spotify, or wherever you get your podcasts from. Thank you and goodbye.