As the summer driving season in the US comes to an end, the demand for fuel is beginning to collapse from what seemed like a modest recovery at most. As a result of an alarming decline in demand, OPEC had no choice but to revise its oil demand forecast for the remainder of the year, once again.
According to a recent IHS Markit analysis, the final week of August saw the demand for gasoline across the US fall by 1.9%, while the four-week rolling average fell by 18.2% compared to the same time a year prior. At the beginning of the pandemic, gasoline sales fell by more than 50%, but then were the subject of a modest recovery as restrictions were eased across the country and the summer driving season got underway.
However, as IHS Markit chairman Daniel Yergin notes, the sudden demand decline as summer comes to an end suggests that the inherent economic problems stemming from the pandemic are significantly deeper than previously assumed, and the oil market still has a long road ahead before a strong recovery is achieved. Moreover, it is not likely that demand will recuperate in the remainder of 2020, which in turn will cause oil inventories to pile up even more.
As per the Energy Information Administration’s (EIA) weekly report, the last week of August saw gasoline inventories fall by more than 3 million barrels; however, the drop is predominantly attributed to Hurricane Laura, which forced refineries to close down along the Gulf Coast. Holding all else equal though, the continuation of the coronavirus pandemic will most likely keep hampering demand for oil products, which in turn will cause inventories to pile up across the US.
The dwindling demand for fuel is not only subject to the US; in India and other Asian countries, the demand recovery has been weaker than expected, which in turn caught the attention of OPEC. In a monthly report that was published on Monday, oil-producing countries of OPEC have decided to revise their global oil demand forecast to reflect a new average of 90.2 million barrels per day in 2020. The new forecast represents a decline of 400,000 barrels per day from OPEC’s August report, and a drop of nearly 9.5 million barrels per day on a year-over-year basis.
Additionally, OPEC anticipates that oil demand will remain subdued until at least the second half of 2021, as coronavirus risks continue to be elevated. Although many countries, especially the US, still remain hopeful that a stronger economic recovery will ensue any minute now, OPEC’s anticipation of a declining oil demand growth potential suggests otherwise. OPEC Secretary-General Mohammad Barkindo notes that the alarming rise in virus infections around the world, coupled with ensuing economic recessions not witnessed since the Great Depression, will certainly have an impact on the oil demand timeline of recovery.
Information for this briefing was found via IHS Markit, EIA, and OPEC. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.