Oil & Gas Demand Post COVID-19

Countries have been shut down and markets are reacting to an unprecedented situation. Concern for the global economy is far surpassed by the immediate concern for the safety of loved ones. In that regard, we thank those fighting the pandemic on the front lines and urge everyone to do their part by staying home to help curb the spread and support those most impacted. 

How the Virus Will Impact Products Demand in Unexpected Ways 

Businesses and individuals need to plan for how this crisis will change the world when we get through to the other side, which we most certainly will. While the immediate oil and gas demand drop is apparent, we are most interested in predicting the responses upon recovery to help prepare ourselves and our clients. There are two that we had estimated and are starting to observe in the data: 

  • a v-shaped recovery in gasoline demand looks increasingly likely due to reduced public transit in recovering economies.
  • an expected increase in petchem demand due to a transition to packaged goods, particularly in Asia. 

We’re not in a position to know when we’ll make it through to the other side, only that when we do these increased consumption trends seem highly probable (and are already playing out in certain countries). 

Gasoline Demand Increase Above the Levels Prior to the Virus 

China case numbers have declined rapidly and economic activity is returning. A great way to track this is through TomTom (Guangzhou traffic report) where you can see that during the weekdays the congestion on the roads in major cities is starting to approach 2019 levels. We like watching the trend of recovery as positive news seems infrequent these days, but it’s also a useful data point. Economic activity has not yet reached the levels suggested by the car traffic data, which indicates that a higher percentage of people are shifting to personal vehicles than in the past. 

Both government and personal decisions are reinforcing this trend, although it’s difficult to know yet which is having a larger impact. 

  • Governments continue to restrict public transit in high-risk areas. Significant testing, tracking, and immediate isolation of emerging cases seem to be the best approaches to get control of the epidemic. South Korea is probably the best example of achieving this to date, as is China once they made it a national effort. If an individual tests positive and they’ve been on public transit, containment becomes far more difficult, and as such public transit in high-risk zones remains restricted even if normalcy is starting to return.
  • The personal decision to avoid public transport is a natural response to a virus that remains the most difficult to control in densely populated areas. Many people who would have normally taken the bus / train to reduce costs or emissions will shift towards driving or car-pooling in smaller groups to minimize the higher risk of infection associated with increased contact. 

It would be expected that both these factors will also be present when North American cities are no longer under varying levels of quarantine. 

Petchem Demand Increase from Changing Health Rules and Consumer Preferences 

A longer-term trend is the expected increase in packaging, particularly in Asia. This is due to both health safety regulations but also personal preference trends as a result of everyone’s experience with COVID-19. Petrochemical demand, primarily plastics and chemical production, was already a key source of demand growth for oil and gas with 40% of global plastics used for packaging (source: IHS Markit). A country like China currently still has a lower per capita plastics use than the US, with individuals in China using about a third of the plastic of a typical American, according to the World Bank. This is driven by larger middle-class consumption in the US and by US purchasing habits that use more packaging. These packaging norms will likely shift rapidly as a result of the virus. A ban on wildlife markets is already being implemented across China as food safety is given a closer look post the Coronavirus. These markets were previously a source of protein in many diets and this alone will transition cities to increased packaging and refrigeration, as individuals replace this consumption with safer alternatives. The second major trend is a shift to pick-up or delivery, both of which increase the amount of packaging. Meituan, one of the larger food delivery companies in China, has seen orders increase by 4x and is having trouble hiring enough couriers (source credit to BI interview). These orders from area restaurants are made by a chef in full protective gear, sealed in delivery bags, and delivered to a pickup spot for no human contact. Many open-air pickup foods like buns are now also all sealed in plastic and passed through special windows to customers. These trends will likely be a key factor in increasing packaging, and plastics use, to a per capita level that is closer to that of the US. 

A multi-year shift in petchem trends for certain regions might now occur in a few months and gasoline consumption will probably be a larger part of a family’s day in recovering countries. While it is difficult to understand how long these trends will last, we are reminded that it takes around two months to form a new habit and some part of this will likely be structural.

Mark Le Dain

Mark Le Dain currently runs strategy for Validere and previously worked as an energy investment banker. Mark has significant experience advising energy and infrastructure companies, successfully completing over $18 billion of M&A transactions and $5 billion of capital markets transactions.
Mark Le Dain