London — Investment bank UBS became one of the first oil market watchers to scale back its forecasts for the oil demand destruction from the COVID-19 pandemicTuesday amid growing signs that global activity has turned a corner as lockdowns start to ease.
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Reducing its estimate of the impact of oil demand during Q2 by 5 million b/d to 15 million b/d, UBS said it sees clear signs of strengthening demand recovery as travel restrictions ease. Global crude prices rose on Tuesday as more countries start to ease economic and social lockdowns while traffic levels, a key proxy for oil demand, continues to recover. On the supply side, almost 10 million b/d is set to exit the market as the new OPEC+ cuts start to kick in.
Front-month Brent crude futures rose over 10% to top $30/b in midday European trading Tuesday, the highest since April 15.
"Many market participants believe there is light at the end of the tunnel. We too think we are moving in the right direction," UBS analyst Giovanni Staunovo said in a note. "...we still expect oil demand to contract strongly this quarter, though not as much as we did before."
Traffic flows rising
Preliminary data indicates US oil demand has started to improve and global road traffic and congestion data are also showing signs of a rising activity trend.
Traffic in major US cities began to recover in mid-April and overall driving, a key indicator of gasoline demand, averaged about 85% of mid-January levels by April 24, according to S&P Global Analytics.
In Germany, Europe's biggest oil market which began easing lockdown restrictions in mid-April, traffic congestion stood at 20% below 2019 levels at peak times Tuesday, according to Tom Tom's traffic index. By contrast, in the UK, which has yet to ease its lockdown rules, road congestion in London remained at half of year-ago levels early Tuesday, the data show.
Even in the UK, however, government data show road traffic in Europe's number two oil market has been creeping up since bottoming out in late March when the lockdown was announced.
"The market is still vulnerable but now one thing is clear, the demand bottom is behind us, and this is manifesting in oil prices which are on the rise," consultants Rystad Energy said in a note Tuesday.
Slow jet recovery
But global air travel remains considerably less than last year and commercial flights have only begun to recover marginally. Non-commercial air traffic is continuing to normalize but remains down 35% from pre-crisis norms, according to Platts Analytics.
Platts Analytics forecasts oil demand in April and May will decline 20 million b/d while demand will average 8.7 million b/d lower on the year over 2020. Regionally, China is expected to be first country to see positive demand growth while the world as a whole will enter positive year-on-year demand growth only in January 2021, according to Platts Analytics.
UBS said it expects the oil market to be balanced in Q3 but undersupplied in 4Q, and Brent to recover to $43/b by end-2020 and to $55/bbl by mid-2021.
Last week, the International Energy Agency said global oil demand could fall much less than expected in 2020 if lockdowns ease quickly and the world rebounds from the worst hit to energy demand since World War II. Jet fuel demand is expected to fall by 2.1 million b/d on average or 26%.
A reduced lockdown period and a strong economic recovery in the second half of 2020 could limit the annual decline in oil demand to 6.5 million b/d, or 6%, from 2019 levels, the IEA said, 30% below its central forecast of 9.3 million b/d for the year.