A new forecasting tool to assess the impact of COVID-19 on global petroleum demand launched by Evaluate Energy deviates from most other traditional forecast modeling groups and is currently predicting steeper demand destruction and a recovery that could take longer than other assessments suggest.

“In our view, the recovery may be more complicated than the actual move over the last month from governments asking people to lock down. One thing we’re anticipating is that it’s going to be very challenging — there’s no black-and-white answers and you’re going to have this ongoing debate on whether it’s the right time to open up the economy while protecting lives,” said Bemal Mehta, chief operating officer of Evaluate Energy.

“There’s no recipe book or guide book. So it’s going to be region-by-region developing their own plans about how and when to open up,” he added.

In its initial forecast released Wednesday, Evaluate Energy estimates that global petroleum demand will fall to a low of 64.8 million bbls/d in June 2020. Economic recovery is expected to begin in the second half of 2020 as social distancing policies are relaxed.

The forecast demand for Q4 2020 will average 91.3 million bbls/d. and the average demand in 2020 would fall to 81.2 million bbls/d.

“We do see rapid growth through Q3 and Q4 but [for] the exit in December 2020 we’re anticipating the demand will be just under 94 million bbls/d. That’s still about seven million bbls/d off of the amount before we went into this downturn,” Mehta said.

“Our view is that seven million bbls/d will take considerably longer to come back. You’re looking at probably two-plus years before we’re back to the 100 million-plus range.”

As such, it is anticipated that recovery will continue through 2021 and 2022. Average global demand in 2021 is forecast at 97.2 million bbls/d.

When compared to other forecasts from the likes of the U.S. Energy Information Administration (EIA) and various banking institutions, Mehta said the Evaluate Energy model, which is updated weekly, differs in some key areas.

“We’re anticipating a slower pace of recovery than they are. Our view is the market is simply not going to bounce back as quickly. What I would say is our numbers are fairly in line with indicating demand destruction. There were headlines saying it would be in the 20-million-bbl/d demand destruction range. We’re closer to 35 million here,” he said.

“If you look in the media you would see a lot of reports of between 20 and 30 million and our base case is approximately 36 million bbls/d of demand destruction, which is on the high end. We do have a scenario analysis where the low [end] is in approximately the same range but the recovery is a little bit more torturous.”

Mehta said the Evaluate Energy tool was conceived a few weeks ago and implemented in short order as the group felt there was “a lot of conjecture” in traditional global demand forecasting.

“People were hypothesizing that it’s going to be a reduction of 20 million bbls/d, it’s going to be 25, it’s going to be 30. What we wanted to do was take a more rigorous approach to figure out what’s going on through this moment of demand destruction and what recovery looks like,” he said.

Regional difference will be key

Mehta said that an important differentiating trait of the Evaluate Energy demand forecasting tool is its quest to better understand regional differences in demand destruction and the road to economic and societal recovery.

“I think that’s where we saw the difference. Other people who have been forecasting demand historically before COVID-19 hit, those demand models were more around what GDP growth for a country is or what is the displacement of ICE [internal combustion engines] with electric and what is that going to do to long-term demand,” he said.

“What we wanted to do here is really look at how every region is going to be different. Even in a country like the U.S., the state of New York will have a different trajectory than a Texas or a California or somewhere else,” Mehta added.

“You’ve got to look at each of those regions and understand what’s going on, what governments are asking people to do and then whether the people respond is another story.”

To that end, Mehta said the team that worked on the new global demand tool was able to dig into the regional differences in the early response to COVID-19 and that helped shape the forecasting methodology.

“I think what we’ve been able to do is once you get a sense of that human behaviour that comes out of this you can really get some outstanding insight on what’s going on with demand. The goal then is to look at what’s going on around the world to understand what is that recovery going to look like?” Mehta said.

Three phases to recovery

Mehta said the Evaluate Energy model is focusing on three phases as it monitors the global demand story.

“The service will be a weekly update. What we’re anticipating is that there will be significant changes that are happening every week in trajectory and we want to capture those in the short-, medium- and long-term,” he said.

The three phases are:

• Phase 1 - Pandemic response: (current): It will be critical to monitor the regional progress towards containing COVID-19. Relaxation of distancing policies cannot occur until there is confidence around “flattening the curve.” There is uncertainty around the extent and duration of distancing measures that drive the oil demand outlook;
• Phase 2 - Economic recovery: Evaluate Energy anticipates “vigorous policy debates” in every region about when and how to return to normal. The “jobs vs. lives” narrative will prevail during the summer of 2020. Some jurisdictions may move more cautiously. Others more aggressively. There are no agreed to recovery roadmaps or milestones in any country. As well, significant risks are posed by new regional COVID-19 outbreaks that could occur anywhere, at any time; and,
• Phase 3 - Structural change: This pandemic will create structural changes that will shape the world for years to come. For example, a structural shift towards work from home behaviours may permanently alter average distance driven per vehicle per year.

“We have our eye on three time horizons. The reason for the weekly update is that the short-term horizon can change quite rapidly month-to-month or even week-to-week. And that outlook can change quite dramatically as a result,” Mehta said.

“We’re also monitoring on a weekly basis the actual date that countries and regions will start to restart their economies. It will vary based on how much progress is being made on COVID-19. So you need to have that weekly update.”

Mehta reiterated that the journey to demand recovery will be a long one.

“We’re in an unprecedented time. I think the speed at which markets have been able to shut down and people have been mandated to stay at home and businesses have been shut down is unprecedented,” he said.

“Our view is the recovery won’t be as easy as simply flipping the switch and having markets roar back to life.”