Oil demand is not likely to return to levels seen in late 2019 before the coronavirus pandemic until the end of next year or even later, Daniel Yergin, the vice chairman of research firm IHS Markit told Al Arabiya in an interview.
The oil and gas industry has been upended this year in the face of COVID-19, with demand falling at an unprecedented rate as appetite for petroleum products collapsed. US shale oil companies have been particularly hard hit, as heavily leveraged firms began to fall into bankruptcy amid price pressure caused by the fall in demand.
In April, US oil prices at one point even turned negative, with producers paying buyers to take spare crude off their hands amid fears that storage capacity would run out due to dramatic market oversupply.
When asked as to whether US shale could ever recover to its previously rapid, multi-million barrels per day year-on-year growth, Yergin was emphatic about his response.
“Let me give you a very simple answer, the answer is no … The view that we have at IHS Markit is that shale will be pretty much at a flat level around 11 million barrels per day until the second or third quarter of next year when we start to see it rise again with prices and demand coming back, but that would be a much more modest rate. So that 1.5 million barrels per day, that two million barrels per day that was so disruptive for the oil market, that’s history,” he explained.
Earlier this year the Organization of Petroleum Exporting Countries (OPEC) and its partners, forming the OPEC+ group, sealed a historic output cut deal in a bid to support oil prices as demand collapsed while governments issued stay-at-home orders and lockdowns to combat the coronavirus pandemic. The deal cut 9.7 million barrels per day, or around 10 percent of global supply, from markets.
Since the agreement in April, the group has progressively reduced the cut, with a further 500,000 barrels per day set to be released into the market in January. Existing oil cuts currently stand at 7.7 million barrels per day, or around 8 percent of global supply.
When demand begins to return, Yergin agreed that the low-cost producers of the Arabian Gulf could be the ones to benefit.
“Yes, that is a possibility. I think we will see oil prices rise when we get out what I describe, or what I like to call ‘the virus alley,’ that oil prices stuck between the virus on one side and vaccines on the other, and once we get back to normal economic growth next year, we think over four percent for the world the year after, about 3.6 percent, once we get there we’ll see demand rise and prices will get in to a more reasonable range that will support investment and will at least draw back some investors,” he said.
The recovery in prices is likely to be gradual however, with Yergin adding that it would lack the price spikes that were associated with demand growth in the 2000s.
“I don’t see a spike in prices like we had with emerging market demand growing in the first decade of this century, and I think that there is a greater sense of energy security because of the growth of oil supply around the world, and shale is one of stabilizers for that, and I think from the viewpoint of the oil industry it’s a good thing not to have price spikes because that also negatively effects demand,” he concluded.