Oil and Gas

COVID-19 Has Brought Peak Oil Demand Forward

Global energy consumption growth averaged 2% per year for the last two decades. That growth was in lockstep with the growth of the global economy.

But in 2019, it slowed to 0.6%. And this year, COVID-19 is causing the global demand for energy to contract even more.

In the future, economic growth and energy demand will decouple. The economy will continue to chug along, but the demand for energy will slow.

For the next 15 years, annual energy demand growth will be 1% or less. And by 2035, we should see it peak.

Nowhere is that going to be more apparent than in the demand for fossil fuels. We saw the U.S. demand for coal peak back in 2006 to 2007.

US Coal Consumption by Sector

Now we are approaching the peak demand for oil. The pandemic is just accelerating that.

And the oil market will likely become even more fragile. Many countries are experiencing a second wave of COVID-19 cases.

That means additional lockdowns and continued work-from-home measures. And because of these, air travel numbers are roughly one-third of what they were a year ago.

All of this reduces the demand for oil. From January through July, global demand dropped 10.5 million barrels per day (bpd) from last year’s levels.

Demand for all of 2020 will average 8.4 million bpd less than it did in 2019. And the forecast for next year shows demand increasing by only 5.5 million bpd.

Current demand is roughly 91.7 million bpd. That’s about the same as 2013 levels.

U.S. E&P Woes

U.S. crude producers are feeling the effects of the decreased demand. U.S. crude production will be off 700,000 bpd this year.

With demand down, West Texas Intermediate crude prices continually struggle to move above $40 per barrel. And that’s a big problem for most U.S. exploration and production (E&P) companies.

Between January and now, 32 E&Ps have had to file for Chapter 11 protection. Together, they’ve amassed a total debt of $40 billion.

Another 29 could do so by the end of this year. That would add another $26 billion in debt.

And unless crude prices improve, an additional 150 North American E&P companies will need Chapter 11 protection through 2022.

However, I think the problem could be even worse.

Producers often hedge production to reduce the impact of unexpected crude price declines. Their revenues are directly tied to the price of crude.

At the end of 2019, U.S. E&P companies had 32% of their estimated 2020 production hedged at an average of $52.41 per barrel. That helped some E&Ps mitigate the drop in crude prices.

But none of 2021’s production is hedged, which is a big problem.

Without any production hedges, more E&P companies could go belly up.

And national oil companies could fare even worse. Many need oil prices in the $80-per-barrel range to reach breakeven.

Petrostates, such as Saudi Arabia, Russia and Venezuela, must diversify their economies. Not doing so could seriously impact their economic health moving forward.

Is there any good news here? Not much, which is why I constantly warn against investing in the sector.

But low oil prices do translate into low fuel prices. And that is good news for delivery services and shippers. My colleague Matthew Carr recently wrote about this.

He explained that back-to-school and back-to-college shopping hit records this year. He’s expecting a robust holiday shopping season with a blizzard of package deliveries.

Matthew and I are constantly researching and writing about the latest trends and disruptions and, more importantly, how they affect your investment decisions.

Good investing,

Dave