A post-pandemic world will look very different, and the oil industry will be as much a testament to that as all the others that COVID-19 has run rampage over.
Just when we may have thought that the worst is behind us, a re-emergence of the virus in several parts of Europe and the US, and the ensuing lockdowns, have sent oil demand forecasters scrambling back to adjust numbers. S&P Global Platts Analytics has further downgraded its demand outlook by 200,000 b/d and now expects global oil demand to contract by 8.5 million b/d in 2020.
China is the only country in the world expected to see year-on-year growth in oil demand in 2020 – a marginal 0.3% to 14.8 million b/d, according to Platts Analytics. Overall, Asian refined product demand is expected to decline 1.7 million b/d this year.
The price of physically traded Brent crude has fallen below $40/b several times in recent months, and Platts Analytics does not expect it to stray too much on either side of that level for the rest of the year.
As we reflect on what pieces we will be left picking up once the demand carnage has slowed down, some trends are emerging. Two that stand out in Asia are an altered refining and trade flow landscape, and changing crude oil buying patterns.
Oil refineries in the Philippines and the Oceania region have either already announced closures or are seriously considering it, leaving them dependent on imports to meet most of their oil demand needs. If all closures go through, a little under 700,000 b/d of capacity will be removed, opening up export opportunities for other refiners in the region, particularly the Chinese and South Korean refineries.
Chinese refiners are likely to be best placed to supply to these emerging outlets given the flexibility of their plants – being able to produce varying grades of fuel and, so far, to weather periods of prolonged weak regional margins, with a strong post-lockdown domestic demand helping to sustain refinery economics.
Backtracking on diversification
Asia's top crude oil importers, who had embarked on a diversification drive, are finding themselves returning to the tried and tested Middle Eastern crudes, not least due to attractive pricing and some slowdown in non-OPEC supply availability amid the pandemic.
This trend is likely to get stronger as we head into 2021 and non-OPEC supply is further curtailed. For instance, production in the US, the largest non-OPEC supplier, is expected to drop by 1 million b/d in 2020 and another 1 million b/d in 2021 due to cuts in capital expenditures, a slowdown in drilling activity and rising bankruptcies – 41 exploration & production companies have filed for bankruptcy so far, according to Platts Analytics.
South Korea, which had made diversification core to its energy security strategy, is making a U-turn.
The country was importing barrels from as far as away as North and South America, but is increasingly favoring Saudi crudes these days as they are the most viable and economical feedstock option in times of volatile refining margins and tepid consumer fuel demand.
South Korea made rigorous efforts to diversify its crude import sources over the past several years, with the share of Middle Eastern crude in its yearly procurement basket falling below 71% in 2019, compared with more than 85% in 2015. But this crept back up to around 74% recently.
Japan's share of crude oil imports from the Middle East rose to 95.2% over June and July, the highest on record, with reduced imports from Russia and the Americas among others, according to official data.
China, a key market for suppliers, boosted crude imports from the Middle East, with shipments jumping 18.9% year on year at 5.16 million b/d in the first three quarters, official data showed. The Middle East accounted for 46.3% of the market share compared with 43.8% in the same period last year. In contrast, imports from Africa and South America fell over the same period.
This may bring some cheer to Middle East suppliers, who are currently grappling with a seemingly unending delay to demand recovery amid rising crude oil supplies from Libya.
OPEC, Russia, and other key partners in a supply accord are scheduled to taper their collective 7.8 million b/d production cuts by more than one quarter to 5.8 million b/d from January, having banked on a robust rebound in oil demand from the coronavirus pandemic in the second half of the year.
OPEC delegates have told S&P Global Platts the bloc may now consider extending the cuts. Any new deal would, however, require delicate political negotiations and potentially some concessions to countries weary of reining in production.
Ministers are set to meet Nov. 30-Dec. 1 to negotiate and announce a decision.
"All signs point to OPEC+ keeping their current quotas in place for Q1 2021," Platts Analytics said in a recent note.