You have to go all the way back to the 1970s and the era of the “oil shocks” to find a time as tumultuous for global energy markets as 2020 has been.
The big economic events since then — such as the Asian financial panic of 1998 or the 2008 global financial crisis — certainly had an effect on demand for crude. But neither, nor any other economic disruption over the last 50 years, has inflicted anything near the damage wrought by the coronavirus disease (COVID-19) on global oil demand.
Some estimates suggested that at the peak of the lockdowns in April and May, the world wanted 30 percent less oil than a few months before. There has been some recovery, but 2020 will still be a bleak year for the global energy industry, especially for transport-related fuels.
The International Energy Agency predicts diesel demand down 7 percent over the full year just ending, gasoline down 11 percent, and jet fuel cut by a massive 26 percent as flying was shunned.
The freezing of economic activity in early spring caused the biggest recession since the 1930s, which the International Monetary Fund (IMF) labeled the “Great Lockdown.” Forecasts for global growth were slashed. With oil the most important source of fuel for economic activity, this had an immediate effect on global crude markets.
For a short time in April, on “Black Monday,” American oil prices went into negative territory as consumers were being paid to physically take oil away from refineries — if they could find anywhere to store it.
While the effect on the global economy was savage, for an oil-producing country such as Saudi Arabia the impact was twofold. Not only did the economy slow significantly, but revenue from oil was also hit by falling prices.
Saudi government oil revenues fell to SR224 billion ($59.73 billion) in the first half, down from SR391 billion in the comparable period of 2019.
For a brief period in March, Saudi Aramco had become the biggest oil producer in history as it reacted to the collapse of talks to control supply by dramatically increasing its output, to near a target of 13 million barrels per day (bpd). Oil analysts talked of “shock and awe” as the Kingdom flexed its oil-producing muscles.
But, with demand dropping like a stone, that situation could not last, and in April oil producers decided enough was enough. The meeting of OPEC+ that month agreed to the biggest supply cut in history — 9.7 million bpd — and a special meeting of G20 energy ministers set the seal on it.
Non-OPEC+ producers were also feeling the pain. The US shale industry quickly went into a downward spiral of shut-ins and bankruptcies, Europeans slashed dividends and spending plans, and Asian refiners were squeezed by falling margins and lack of demand.
That was the low point, and from summer onwards, with supply under control, demand began to slowly recover. But it was a cautious and uncertain market environment that had to be managed carefully.
OPEC+ — under Saudi and Russian leadership — instituted a new strict regime of compliance to the new output levels and, for the first time, a system of compensation for those oil producers that, for whatever economic imperative, had oversupplied in the past.
By the end of October, compliance with the new targets was at an unprecedented 99.5 percent, and OPEC+ had led the way to removing a total of 1.6 billion barrels from the market since April.
A new schedule of regular monthly meetings of OPEC+ — similar to the monthly meetings of the world’s central bankers — will gauge how the balance of demand and supply is progressing, starting next month when a plan to put back 500,000 barrels is to be discussed.
The policymakers will have to weigh the strength of economic recovery as second-wave lockdowns and new virus strains continue to put pressure on demand.
Some experts expect it will take until 2023 for oil demand to recover to pre-pandemic levels; others say it will never get back there again, and we have already gone through “peak oil.”
But whatever happens in 2021 in the oil market, it is unlikely to match the extraordinary events of this year.
Credit: Arab News