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Oil Market Flies Blind as Covid-19 Clouds Demand Outlook

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09/22/2020 | 05:55am EDT

By Joe Wallace

Predicting oil demand has rarely been more challenging, buffeting prices and muddying the outlook for traders, investors and energy producers.

Energy analysts are mapping out the course of the coronavirus and efforts to stop the pandemic, including limits on flights, cruises and the use of public transportation. They are also grappling with the effects on fuel demand of an economic downturn, rising unemployment, and changing patterns of work, study and travel.

All this has introduced an unusual degree of uncertainty into estimates for how much oil the world will consume in the remainder of 2020. The lack of visibility has contributed to renewed turbulence in the market after prices rose over the summer, buoyed by the return of cars and trucks to the road.

Brent-crude futures, the international energy benchmark, ticked up 0.6% to $41.70 a barrel Tuesday. This year, Brent has moved between a closing high of $68.91 in early January and a low of $19.33 in April. Only twice since 1990 has the price range been wider. The last time that the market saw such volatility was during the crash of 2014.

"The oil market, in terms of being able to predict what will happen next, is in a very unique situation," Marco Dunand, chief executive of commodities trading company Mercuria Energy Group, said. "This has never happened in history, where people couldn't predict with such a magnitude where the demand could be in three-to-four months' time."

Global oil demand has bounced back from its nadir in April, when the U.S. and other regions locked down to stall the coronavirus. Still, it remains significantly below 2019's record level.

High-frequency data have enabled analysts to track oil demand in real time during this year's crisis, said Gregory Shearer, a commodities strategist at JPMorgan Chase. The data include requests for driving directions on Alphabet Inc.'s Google Maps app, estimates of traffic congestion by TomTom NV's navigational tool, and daily gauges of flight activity.

The near future has become harder to predict, however. Forecasts by the International Energy Agency and the Organization of the Petroleum Exporting Countries have varied widely this year. Their monthly forecasts of demand in the next calendar quarter have differed by 1.3 million barrels a day on average, according to calculations by The Wall Street Journal. That is double the average gap in 2019.

The IEA forecasts demand by estimating current levels of consumption and extrapolating into the future based on the projected speed of economic growth, according to Keisuke Sadamori, its director of energy markets and security. Before the pandemic, the model assumed that demand for jet fuel would keep growing, while gasoline sales could face pressure from improving auto efficiency.

"Covid-19 broke down all those common understandings," Mr. Sadamori said. "This is an unprecedented situation, so it's very hard to predict what might happen in the coming years."

The IEA has adjusted its forecasting model in response, introducing data from Google and TomTom to capture shifts in transportation. The uncertainty has prompted companies to slash their investments in oil-and-gas projects, potentially paving the way for higher prices down the line, Mr. Sadamori added.

"There are so many uncertainties around the pandemic itself," said Regina Mayor, global and U.S. head of energy and natural resources at KPMG. "Even without added lockdowns, spikes in virus numbers increase and people grow fearful and limit their movement again."

China's outsize role in the oil market is another factor clouding the outlook. Imports by the world's second-largest economy have slowed after a buying spree fueled by the plunge in prices this spring.

Tankers departing for China and Myanmar have carried 7.7 million barrels of crude and condensate daily this month, according to cargo-tracking firm Kpler, down from the all-time high of 14.1 million barrels a day in May.

The slowdown in Chinese buying is one reason why Mr. Dunand thinks analysts are overestimating demand for the final stretch of 2020. Crude prices grow more expensive the further out oil is due to be delivered, he said, a sign the market is glutted since this encourages traders to place it in storage.

"We can see at the moment that a fair amount of crude oil is going into storage, whether it's storage on ships or whether it's storage on land," Mr. Dunand said.

Beyond 2020, oil consumption is even harder to gauge because of the transition away from fossil fuels and the pandemic-triggered economic downturn. Past recessions suggest elevated levels of unemployment will hamper oil sales for several years by reducing the number of miles driven.

It took seven years for U.S. gasoline demand to recover after the 2008-9 financial crisis, Ben Luckock, co-head of oil trading at Trafigura Group, said at an industry event in September.

Write to Joe Wallace at Joe.Wallace@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
ALPHABET INC. -2.41% 1529.95 Delayed Quote.14.23%
JPMORGAN CHASE & CO. -1.68% 99.8 Delayed Quote.-27.18%
LONDON BRENT OIL -0.28% 42.29 Delayed Quote.-34.86%
TOMTOM NV -2.44% 6.195 Delayed Quote.-34.24%
WTI -0.18% 40.773 Delayed Quote.-33.28%
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