New Delhi: Global oil demand may have peaked in 2019 as Covid-19 has heightened the risk that behavioural changes such as working and shopping from home may be long-term trends, while renewable energy and electric cars are rapidly reducing the use of fossil fuels, Moody’s said in a research report.
Renewable energy and car sales have expanded in some of the biggest economies even during the pandemic, while transportation demand for fossil fuels will remain muted, which puts a question on the outlook for oil demand and the viability of new projects, it said.
“A structural shift in demand creates greater risk in forecasting the price of oil, undermining the assessment of profitability for new projects by the time oil is produced in the future. This could create stranded assets in the future which do not produce the expected levels of financial returns.
Moody’s does not expect global GDP to return to pre-Covid-19 level until the end of 2021. “If economic growth does not offset the potential behavioural and other changes impacting oil demand, it could take a long time to recover to 2019 levels with increased risk that demand already peaked in 2019,” it said.
Recovery would take even more time for some oil-intensive activities like aviation. Transportation, including daily commuting, air travel and cruises, which account for more than half of global oil demand, will take a long time to recover as business and leisure travel will take a long time to revive, while companies adjust to a new normal where commuting is reduced.
“For many companies, particularly those in information-intensive sectors, having their employees work from home has demonstrated the long-term feasibility of such arrangements, which have been facilitated by the emergence of improved communications technologies and improvements in mobile processing power,” it said.
Further people are reducing travel because of lower disposable income while companies are cutting travel budgets. “The Covid-19 experience has also demonstrated to consumers that they can conduct more shopping online and even do their daily workout without travelling to another venue. Companies are also realizing the significant cost savings of reducing their office space,” it said.
It said “Airlines may also be forced to permanently cut unprofitable routes and reduce services, which will reduce the number of flights. We do not expect to see a substantial recovery in passenger demand until 2023.”
Shipping will also suffer on account of reduced trade, fewer cruises and localisation of supply chains, it said. The change in behaviour and social-distancing norms will prevent low oil prices from stimulating demand, it said.
Moddy’s said first-quarter auto sales in Europe indicate that sale of electric vehicles and hybrids continued to rise even though overall car sales halved. A similar picture is emerging in China. “Market consensus indicates that electric vehicles will be price competitive with those using internal combustion engines by 2025, and the increased range available on forthcoming models removes range anxiety.”
Oil demand would fall further after 2025 as emission targets in China, Europe and California require more electrification and greater internal combustion engine efficiency, it said.
Renewable energy is also challenging fossil fuels. “We expect renewables to generate more power in the US in 2020 than coal, continuing the trend observed to date this year,” it said.