Global crude and petroleum products market

Global economy

The pandemic exacerbated the major pre-existing problems in the global economy of recent years: a slowdown in economic growth, high sovereign debt levels, the uneven development between nations, the gap between the real economy and financial markets, protectionism and a slowdown in international trade. These factors may have a negative impact on global economic development and thus on energy consumption in the coming years.

Early in 2020, the spread of coronavirus already resulted in restrictions on the movement of people and cargo, closure of borders, abrupt drop in international and regional flights, disruptions to logistics and manufacturing chains, and lower consumer and industrial activity. The economic consequences varied depending on the stringency and efficiency of each particular country’s COVID response. For example, China brought its epidemic under control early on, and was one the few countries that showed GDP growth (+2.3%) at the end of the year, while India’s GDP slipped about 8%. According to International Monetary Fund estimates, the global economy shrank by 3.3%International Monetary Fund in 2020 after growing by 2.8% in 2019, with the GDP of advanced economies falling by 4.7%, and emerging market and developing economies by 2.2%.

With central banks’ monetary policy already mild, many governments responded to the pandemic with massive financial injections to support their economies and stimulate consumer activity. The broad range of response measures included directly handing out money to the public. In 2020, the largest central banks’ balance sheets grew by a few trillion US dollars, a lot more than during the 2008 crisis, raising questions about the impact of debt burden on further economic growth and stability of the key global economies.

Unprecedented monetary stimulus and lower central bank interest rates helped financial markets to recover quickly from the shock of the first months of the pandemic, and to show stronger growth than the real economy during the year. Major stock markets showed significant growth in the crisis year, with company valuations hitting multi-year highs. These conditions resulted in a few speculative tech-company bubbles.

Unlike advanced economies, most emerging market and developing countries cannot simply print money to support their economies. This makes economic growth even more uneven and aggravates social problems in countries ravaged by COVID-19. The pandemic has already resulted in a significant increase in the number of people who are hungry or in need of humanitarian aid and protection – 1 in 33 people worldwide according to the UN estimates.Global Humanitarian Overview 2021

International trade, which had already lagged behind economic growth, was held down further in 2020 amid the economic downturn and logistics challenges. Over the year, global trade contracted by about 6%Global Trade Update. Trade began recovering towards year-end 2020, in part driven by pent-up demand. However, the vulnerability of international manufacturing and trade chains, which the pandemic laid bare, could lead to economic localisation and regionalisation in the medium term.

Decarbonisation as a possible scenario of post-COVID economic growth has been the subject of much debate. A proposal to make incentives for low-carbon technologies and markets a key part of an anti-crisis package was tabled at IEA, an organisation representing OECD countries. The European Union declared a push for global energy transition and investments into low-carbon energy to be part of its foreign strategy. The carbon border adjustment mechanism was announced, with the stated purpose to make sure that products imported into the EU do not have an unfair advantage over locally-made products. The role of decarbonisation in the global economy is expected to grow.

The recovery of the global economy has been uneven: in late 2020–early 2021, a second wave of lockdowns ushered in renewed economic slowdown in Europe. GDP growth projections for 2021 may be revised depending on the success of response to the pandemic. The start of mass vaccinations gives rise to hope that global economic growth will be more stable in the second half of 2021.

However, the success or otherwise of anti-COVID efforts, the severity of restrictions, the recovery of international passenger and cargo traffic, a high debt burden (both public and private), economic inequality and protectionism hindering trade and international integration remain the key challenges facing the global economy. These factors will influence the situation not only in 2021, but also in the medium term.

GDP of key economies in 2020,% year-on-year

International environment

The influence of politics on the global hydrocarbon market remained strong in 2020. Crude oil production in Libya was low for the better part of the year, as opposition blockaded main ports in the country. The impact of this force majeure amounted to about 1 mbd,TRADING ECONOMICS but it has not gone unnoticed by global markets amid the major slump in demand. Oil production in the country recovered by year-end.

Oil production in Venezuela and Iran, still under US sanctions, remained low. The expected change of administration in the USA and the reduced sanctions pressure prompted Iran to start ramping up production in the second half of 2020.TRADING ECONOMICS Thus, non-OPEC+ production started to grow in early 2021. The recovery potential is high enough to influence the global market balance and capabilities of the OPEC+ countries.

According to experts, the new US administration is expected to favour more constructive foreign and trade policy. A new trade deal with China is one of its 2021 priorities. The commitments of the Phase One trade deal signed in early 2020 were not met, in part for objective reasons as trade suffered from the pandemic and falling prices. The overall recovery in global trade, as well as global energy demand dynamics, might be contingent on whether the USA and a strengthened China reach a trade compromise.

Global shortfall in oil production, mbd

Regulation and climate agenda

The events of 2020 gave a strong impetus to the green agenda, which is gaining traction in international politics and the global economy. The lower global energy consumption in 2020 is estimated to have reduced anthropogenic greenhouse gas emissions by 5%–7%.Made of minds This offers an opportunity to get closer to the emission curve envisioned by the Paris Agreement, provided that other countries also make sustained efforts. Moreover, investments in low-carbon energy and decarbonisation can be a driver of post-pandemic economic recovery in Europe and the USA, which, in any case, would require government support.

As the European Union is ahead of the curve on decarbonisation and the development of the low-carbon economy, it is objectively interested in tighter global climate regulations, which would, among other reasons, ensure its own manufacturing industry remains competitive. For other economies, this scenario could cause problems for both competing in international markets and for forcing businesses and people to bear the costs of decarbonisation.

In 2020, the European Union announced that its carbon adjustment mechanism would come into force in the near future, to make sure that importers pay greenhouse gas (GHG) emission taxes comparable to those of European manufacturers. The mechanism is still being finalised, but, when adopted, this carbon border tax may not only restrict access of energy-intensive and high-carbon products to the EU market, but also set a precedent for the future development of the broader international trade system.

Global CO2 emissions by the energy industry, billion tonnes per annum

It was not only nations that embraced the decarbonisation trends in 2020. Some large corporations, including oil and gas companies, pledged to reduce GHG emissions and become carbon neutral in the long run. Banks and investment funds are curtailing investments in hydrocarbon energy and expanding the scope of ESGEnvironmental, Social, Governance criteria to cover environmental and social aspects of business activities, as well as the quality of corporate governance. Towns and cities are also implementing comprehensive solutions to cut their carbon footprint and environmental impact.

Despite the irregular and inconsistent development of the low-carbon economy, it is gradually becoming an integrated long-term trend. For the oil and gas sector, this trend spells tighter environmental requirements for product standards and production chains, more intense competition in export markets, as well as a need for economically viable technologies and regulatory mechanisms to offset and reduce emissions.

Renewable energy and transport development

Despite the challenging environment in 2020, global investments in renewable energy remained flat at $300 billion,IRENA as in the past few years. In 2020, more solar and wind capacity was added in absolute terms, with gradually decreasing per-unit costs. According to IRENA, a total of 260 GW of renewable capacity was commissioned globally in 2020, up 40% year-on-year, with China remaining the undisputed leader in renewable energy growth, both by volume and growth rate.IRENA

The total size of the global low-carbon energy market, by some estimates, reached an all-time high of $500 billion, spearheaded by the growth in electric vehicles. In 2020, global EV sales increased while those of internal combustion engine vehicles declined, although EV sales trends varied widely between global regions. EV sales (including plug-in hybrids) remained almost flat in the USA, grew by about 9% in China,S&P Global Platts and increased 2.6 times in the European Union.Global Plug-in Vehicle Sales Reached over 3,2 Million in 2020 The record growth in Europe, where EV sales outstripped those in China in 2020, came on the back of regulations setting new binding targets for average CO2 emissions from vehicles for automakers. By year-end 2020, EVs accounted for 20% of total vehicle sales in the European Union. Amid falling sales, China extended EV subsidies until 2022, which bolstered sales.FORTUNE

In total, various incentives helped global EV sales grow by about 40% in 2020, while the overall vehicle market lost about 15% over the year. The share of EVs and hybrids on the new vehicle market grew from 2.5% to 4%, reaching approximately 1% of the global vehicle fleet. The further electrification of the automotive sector will depend on government support and the actions of carmakers, many of which announced plans to ramp up EV production or even stop producing internal combustion engine vehicles altogether.

EV sales in major markets, thousands of units

Demand for crude oil and petroleum products

Tight restrictions imposed by various countries during the first wave of COVID-19 led to a global slump in petroleum product consumption at an unprecedented scale and rate. By various estimates, demand for liquid hydrocarbons in April–May 2020 dropped about 20% year-on-year. Petroleum product consumption increased as restrictions eased, averaging out the annual reduction in demand for liquid hydrocarbons in 2020 to about 8%–9%.

Air transport accounts for more than half of that loss, as this industry was hit harder than other petroleum product consuming industries. The International Air Transport Association (IATA) said 2020 was the worst year in history for global air travel. Global demand for international air travel fell by three quarters in 2020, and by about half for domestic travel.IATA Demand for air cargo decreased by about 10%.DC VELOCITY Early in 2021, restrictions on international air travel are mostly still in place, with the prospects of a recovery further darkened by differences in the course of the pandemic in different countries, unresolved issues surrounding mutual recognition of vaccine certificates, and the risk of a slower pace of economic activity recovery (including demand for travel). IATA expects global passenger numbers to return to 2019 levels in 2023 or 2024.IATA ANNUAL GENERAL MEETING

With demand dynamics varying widely between petroleum products and world regions, the global refining industry was faced with a challenge. Price differentials for key petroleum products to crude dropped to multi-year lows amid falling demand for fuel and a rapid build-up of surplus inventories. Market conditions were relatively good for naphtha as a petrochemical feedstock, as demand for petrochemicals was hit less hard and was even supported by medical supplies and packaging amid the pandemic. Fuel oil was in demand both as a feedstock for further processing and as marine fuel. New regulations from the International Maritime Organisation (IMO) on sulphur content in marine fuel took effect, but it did not provide much support for the marine gasoil market, as the industry opted for low-sulphur fuel oil and overall demand for marine fuel was low due to COVID-19.

Vehicles sales in major markets, millions of units

Refining capacity in China and the Middle East continued to grow at pace despite a lack of demand for petroleum products, while low utilisation rates and margins in oil refining have accelerated shutdowns in mature markets. 2020 saw a string of announcements revealing the shutdown or conversion of large refineries in Europe and the USA. Refining capacities remain in surplus amid lower demand and new refinery startups, which may put pressure on petroleum product prices and refinery economics throughout 2021.

The unprecedented volatility of the crude market in 2020 led to varied predictions of future trends. The most extreme forecasts claim that crude consumption will never reach its 2019 levels, but the expert community in general leans towards scenarios with a short-term growth in demand. According to IEA’s reference case, demand for crude oil will not decrease until at least 2040, although it will follow a lower and flatter curve than in pre-COVID forecasts. According to the IEA, the 2019 demand level could be reached in 2023, i.e. the overall impact of COVID-19 on the oil industry may be felt for three to four years.

Changes in oil consumption by sector to 2040 (forecast), mbd

Demand for crude and petroleum products and the OPEC+ agreement

In early 2020, oil producers had to adapt to an abrupt fall in demand and price. Production cuts – both voluntary and involuntary, depending on the producer, – stabilised the market. As of the beginning of 2021, OPEC+ production remained well below potential, but was gradually growing amid recovering demand.

On 12 April 2020, the OPEC+ producers agreed on massive production cuts, which proved to be a decisive factor in restoring the global oil market balance and price recovery. The parties agreed to cut crude oil production by 9.7 mbd from the October 2018 baseline (Russia and Saudi Arabia cut production from an 11 mbd baseline) and gradually restore it by April 2022. As at the beginning of 2021, production recovery was somewhat behind the original schedule as the parties started discussing the market situation and setting production levels on a monthly basis and Saudi Arabia opted for larger cuts.

Other producers also voiced the need to cut production amid falling demand, however their cuts were not voluntary. US crude production responded to falling prices rather quickly, declining from 12.7 mbd to 10 mbd between March and May 2020. Oil drilling activity in the USA hit a multi-year low in 2020. Crude production was supported by bringing online previously drilled wells in shale plays and projects in the Gulf of Mexico. Crude oil production in 2020 averaged 11.3 million bbl/d, down 0.9 million bbl/d from the record level of 2019.eia The Energy Information Administration of the US Department of Energy forecasts that moderate oil prices may allow US production to start growing at the end of 2021 and hit record levels by 2023.OIL PRICE

Price differentials for petroleum products to crude oil in Northern Europe, $/t

Changes in oil production by other non-OPEC+ countries were less dramatic. Average annual production in Brazil and Norway grew as new fields came online. However, major investment cuts will seriously curtail opportunities for ramping up production outside OPEC+ in 2021. In the near term, growth potential will be concentrated within OPEC and the Russian Federation.

Strategy and response of oil companies

Amid plummeting prices and demand, oil and gas companies mostly focused on maintaining financial stability. According to IEA estimates, investments in oil and gas development and production were reduced by almost a third in 2020. Many companies in the industry went beyond reviews of their investment programmes, with massive layoffs and OPEX optimisation. A similar situation was seen in the global oilfield services industry, which faced a slump in demand.

The industry continued its gradual diversification as new and non-core businesses, such as renewables, were hit less hard by investment cuts than their conventional counterparts. However, despite big ambitions for decarbonisation and investments in various new businesses, from hydrogen production to small, modular nuclear reactors, the oil and gas sector is yet to become a major player in the low-carbon energy market.

The tough financial situation facing international integrated oil and gas companies, a partial reorientation towards their non-petroleum business, and investor pressure may limit their ability to produce liquid hydrocarbons in the future. In this case, the crude oil and petroleum product market structure may swing in favour of national oil companies, not only Middle Eastern NOCs, but also, for example, Asian and South American companies.

Oil drilling and production in the USA, mbd
Investments by global oil majors, % year-on-year