Globally, the oil-demand scenario has witnessed the biggest slump amid the outbreak of novel coronavirus. The dual shock of the pandemic-led demand disruption and a supply glut has indelibly impacted the oil and gas industry. As economies worldwide came to a virtual standstill, thanks to the lockdown and stay-at-home orders, the recent months pushed the industry into an unprecedented crisis.
The sector already suffered a setback due to concerns about long-term sustainability as the world seeks to curtail its use of fossil fuel. With the virus causing the most catastrophic dip in the energy sector across the globe, the speculation about the demand recovery and long-term oil consumption intensified.
Per International Energy Agency (IEA), pre-COVID oil demand across the world was pegged at approximately 100 million bpd. In its latest report, IEA foresees demand to drop to 91.2 million bpd, recording a loss of 8.6 million bpd. In view of this bleak demand outlook, even big energy players like ExxonMobil XOM and Chevron CVX had to rationalise their planned capital budgeting for the current year.
Given the coronavirus-induced dwindling demand for oil, ExxonMobil slashed its 2020 capital budget by 30% to roughly $23 billion. The Zacks Rank #2 (Buy) company also decided to lower planned cash operating expenses for this year by 15%. Meanwhile, Chevron now expects to spend $14 billion for the year, indicating a fall from the previous annual capex estimate of $16 billion, which was lowered from an approximate $20 billion. The current projection is 30% less than the original guidance. The company is also targeting a $1-billion cutback in operating costs.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Oil Demand Tepid by Work-From-Home Trend
The impact of lockdown to curb the spread of the coronavirus has been majorly seen on commuting and business air travel with less frequently used private vehicles and jets. Strikingly, COVID-19 has entirely transformed the way organizations function as they are now resorting to Zoom ZM, Microsoft’s MSFT Skype and other digital platforms to conduct businesses without physical interactions. Many companies shifted to home-based working with Twitter TWTR, Facebook FB and Shopify SHOP allowing employees to work from home indefinitely.
Remote working has taken off big time and is becoming the new normal. Per reports, gasoline comprises 45% of overall oil demand in the United States, and people driving to and from work represent 28% of total demand for gasoline. If this trend of work from home continues even on the post-pandemic landscape, then oil usage could be moderated for good.
S&P Global Platts reckons 1-1.5 million bpd (million barrels per day) to be lost permanently from people no longer travelling to work with slackness in business travels inducing a loss of another 1.5-2 million bpd.
Financial services firm Raymond James expects high unemployment rate and remote education to also negatively impact oil demand with vehicle fuel consumption to witness a demand loss of 1.6 million bpd in 2021 compared with the pre-pandemic levels and 400,000 bpd in 2022. In terms of jet fuel consumption, demand loss is expected to be 2 million bpd and 800,000 bpd in 2021 and 2022, respectively.
Oil prices already started to recover on global output cuts and easing of lockdown norms. However, it is hard to assume the pace of demand recovery as some restrictions still remain and the possibility of a second wave of COVID-19 looms large. Also, it is too early to comment on the long-lasting effects of the virus. Unexpected loss of oil demand has also been accompanied by unforeseen production cuts. Thus, it is not easy to anticipate how human behavior will adapt to the new normal.
While people are limiting their travels, the crisis could also be an inflection point for oil consumption. People may shy away from taking public transport, thereby boosting private car use while low gas prices could delay the adoption of electric vehicles. An uptick in home deliveries of food and goods will also possibly buoy demand for oil. Also, the race for green energy is gaining momentum but the transition from conventional energy sources will not be easy at all.
Looking at the bigger picture, it is difficult to predict the long-term impact of the coronavirus and work-from-home trends. The intensity with which the COVID-19 outbreak is impacting economies globally calls for an ongoing revaluation of the cause-effect consequences. The speed of a hopeful economic revival from the pandemic-plagued times will indeed have a larger impact on shaping the future of oil demand than new travel plans.
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