Oil prices have dived in the past week with the benchmark West Texas Intermediate (WTI) crude falling more than 12 per cent to $US36.31 ($50.26) per barrel on concerns about global oil demand and a weak stock market.

The broader Brent benchmark has also slipped below the $US40/barrel mark.

This was certainly not helped by Saudi Arabia slashing its official selling price to Asia and the US, which is a sign that oil demand is lacking.

In its August Oil Market Report, the International Energy Agency downgraded its oil demand forecast for 2020 by 140,000 barrels per day (bpd) from its previous month’s estimate due to the “stalling of mobility as the number of COVID-19 cases remains high, and weakness in the aviation sector”.

Oil pundits are also starting to realise that while multiple vaccines are being worked on, it will be some time before enough doses of any successful vaccines become available.

 

Long-term price assumptions slashed

Fitch Ratings has reduced both its 2022 and long-term prices assumptions to reflect large underutilised production capacities, the extended period of high oil inventory caused by the coronavirus pandemic, falling upstream unit costs and the long-term energy transition.

Fitch now expects the Brent and WTI to average $US50 and $US47 per barrel in 2022, down from its previous estimate of $US53 and $US50 per barrel respectively.

Its long-term price assumptions aren’t any better, with the two benchmarks expected to average $US53 and $US50 per barrel, down from $US55 and $US52 per barrel respectively.

That is pretty much in line with supermajor BP’s decision in June to cut its long-term investment appraisal price by 27 per cent to an average of just $US55 per barrel between 2021 and 2050.

Fitch added that the transition to low-carbon energy could also affect prices in the long-term by reducing demand.

“The timing for oil demand peaking will be influenced by changes in regulation, taxation and technology, which are difficult to predict, but we believe the energy transition will materially reduce oil consumption growth prospects from the mid-2020s,” the ratings agency noted.

 

Future oil demand

Looking ahead, Bank of America Securities predicted that it would take three years for global oil demand to rebound to pre-pandemic levels.

It noted that while road fuel demand had recovered to nearly pre-pandemic levels, aviation fuel demand remained constrained and was likely to stay that away until an effective cure or vaccine for COVID-19 became available.

Should a vaccine be rolled out at the end of 2021, air travel could recover to 75 per cent of pre-pandemic levels in 2022 and 90 per cent in 2023.

The bank added that global oil demand could peak at 105 million bpd in 2030 due to the rising share of EVs in light vehicle sales.

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