Global energy demand has experienced a huge demand shock with the onset of the coronavirus pandemic. The rapid imposition of restrictions on movement and commerce has left every sector across the global economy reeling from the impact.
In the weeks since the strictest measures were put in place across most developed countries, demand for oil has plummeted. The International Energy Agency predicts that global demand will drop by 9.3 million barrels/day (b/d) this year.
And even though supply is set to fall by around 12 million b/d in May after OPEC members reached a new production agreement last week, the IEA believes this will not be enough to balance the market.
Markets were quick to reflect the growing imbalance. The double shock of the Covid-19 pandemic and the brief oil “production war” between Saudi Arabia and Russia triggered a drop of as much as 40% in WTI prices between Friday March 6 and the following Monday.
To be clear, WTI prices were already in decline after having peaked in early January when reports of the virus began to circulate and cases began to be reported outside China. The forward May prompt month is showing steep negative prices given fears that storage capacity could run out. Already, oil companies are using tankers for interim storage. June still remains in positive territory for now.
Refined product demand has also collapsed, as the imposition of social distancing and lockdown policies led to a dramatic decline in road traffic.
U.S. demand for gasoline fell by 30% in the last week of March, and IHS Markit says it could shrink by up to 50%. For jet fuel it will be even worse, as airlines have grounded as much as 96% of their fleets.
Road traffic data assembled by Inrix showed that road traffic in major US cities fell by as much as 50% by mid-March, compared to a month earlier, as the lockdown and social distancing guidance began make themselves felt in earnest.
UK road travel fell to levels not seen since 1955, and nitrous oxide pollution from traffic and industrial activity has fallen dramatically in areas like Italy’s Po Valley.
In contrast, demand for electricity and natural gas for domestic use has fallen much less, as families have been largely home bound for several weeks. Of course, industrial and commercial demand has fallen, and this is reflected in the overall weaker pricing.
A simple index chart of European energy prices shows that, apart from oil and carbon allowances, prices have remained pretty resilient.
European Energy Price Index 2020
Of the major energy commodities, coal was the least affected in Europe, and this reflects two elements. Firstly, Europe is not buying a significant volume of coal at the moment, as the power sector has largely avoided it, and secondly coal prices are being set by other more buoyant markets, chiefly the Australian and Chinese markets.
Both power and natural gas markets have been reflecting the diminishing demand from industry, as factories have closed amid social distancing orders and most commercial activities have been curtailed.
A solid example of the shrinking demand can be seen in the Italian electricity grid load, which has fallen to levels not seen except in major holiday seasons such as Easter or Christmas.
Already though, the discussion is turning if a return to normal social, commercial and industrial activity will resume in the foreseeable future, and what the full long-term economic impact of the pandemic will be. And while analysts and forecasters have yet to fully understand the nature of the crisis, it’s clear that it will take some time before the energy sector can fully digest the demand shock.