How Has COVID-19 Impacted Oil Supply and Demand?

How has COVID-19 affected oil supply?

The COVID-19 pandemic has not only changed the oil demand picture, but has also altered the oil supply side as well. According to the IEA’s data, declining demand in 2020 left the global oil market with “a record 9 mb/d spare production capacity cushion that would be enough to keep global markets comfortable at least for the next several years.”

However, the notable shift in capital from fossil fuels to clean energy by governments, and even the big oil companies themselves, is likely to curtail the expansion of global oil production capacity.

A 2021 survey conducted by market research firm DNV GL found that 57 percent of senior oil and gas industry professionals are actively taking steps to increase the role of renewables in their energy mix, up from 44 percent who were doing so in the previous year.

“The financial markets — through the effects of the COVID-19 pandemic — have seen what peak oil demand could look like, and are increasingly factoring in changing sentiment in society towards a decarbonized future. Decarbonization has moved from something on the horizon to an immediate priority, and there are signs that our sector may invest to transform rather than cut its way out of the present crisis,” said Remi Eriksen, group president and CEO of DNV GL.

The IEA states that upstream investment in oil production capacity for 2020 was down by 30 percent from 2019 levels. The agency expects that such spending will increase in 2021, but “only marginally.” The situation may result in a tight supply scenario for the oil market by 2026, with production capacity expanding at only half the rate needed to match anticipated demand. “By 2026, global effective spare production capacity (excluding Iran) could fall to 2.4 mb/d, its lowest level since 2016,” warns the IEA.

While the US oil industry has dominated global oil supply growth in recent years, a looming supply deficit could benefit nations that are part of the Organization of the Petroleum Exporting Countries, including Saudi Arabia, Iraq, the United Arab Emirates and Kuwait.

On the demand side, the US is the world’s largest oil-consuming country, and social distancing restrictions are relaxing at the same time as COVID-19 vaccine rollouts are in overdrive. That, coupled with another round of government financial aid, is expected to create a surge in crude demand in the country, according to Commerzbank analyst Carsten Fritsch.