The COVID-19 period will be viewed“as an inflection point for the global energy transition,”according to Mark Eramo, global vice president/oil markets, midstream, downstream, chemicals at IHS Markit.
The impact of the pandemic going forward on the decarbonization of energy consumption“causes a faster pace of change, versus what we’ve seen in the past,”said Eramo, speaking at the Chemical Industry Financial Outlook & Sustainability Forum 2020, being held in a virtual format and hosted by IHS Markit.
Peak oil demand may also now have taken place, Eramo says.“We believe COVID-19 has reset oil demand at a lower level. With the move to work from home—even after we get a vaccine and get back to normal—we’re looking at scenarios where 2019 could be that peak in world oil demand, depending on whether we return to our commutes, by car, train, or plane, and the degree that all that comes back.”Oil demand in 2020 is forecast by IHS Markit to be about 94 million b/d, well down on the 2019 total of just more than 100 million b/d.
Oil prices of below $50/bbl are likely to remain through mid-2021, with a“slow steady increase”to the end of this year and into 2021 expected, before demand starts slowly to correct the oversupply situation, Eramo says. The energy transition is also at the heart of a strategic restructuring of the refining sector, which has been accelerated by the pandemic, he says. The restructuring process will impact the petrochemical industry, because of the feedstocks that the refining sector supplies, while“petrochemical integration with refining is also back in focus,”he notes.
Companies examining opportunities for integration are faced with issues such as high capital and the cost of entry, according to Eramo.“If I’m running a refining asset and want to view petrochemicals as a means for growth in the future, what’s my cost of entry to do that,”he says. This is a process already taking place in China, he says. Chemical yields per barrel of oil have risen over time from less than 15% to a point where assets under construction or operating today can yield 40-80% per barrel, he notes.
The integration trend also is being driven by“this narrative of peak oil, driven by the refining industry and those in the upstream and midstream markets looking at petrochemicals as a potential vehicle for growth. Because, in a peak oil world, you can look at petrochemicals that we believe will continue to grow at a very reasonable multiple of GDP,”Eramo says.
For global chemicals demand, IHS Markit sees a“snapback”in 2021, followed by a settling period similar to that seen in 2009-11 following the global economic crisis. Strong growth in 2021 is expected as supply chains are refilled, before there is a period of steady growth of 15-20 million metric tons annually, Eramo says. He highlighted ethylene as a product forecast to“actually see some growth this year, a lot of it stimulated by the growth in PPE [personal protective equipment], as well as the health and sanitization for protective gear, that is creating strong demand.”The shift to work from home and increased packaging required for goods being delivered to homes shows there are“a lot of different stimulus at work here,”Eramo says.
The global economy is facing a“bounce, fade, and slog scenario,”said Nariman Behravesh, senior vice president and chief economist at IHS Markit, also speaking at the virtual event.“By that we mean that, in any event, the moment of growth that we saw in the third quarter was unsustainable, with growth rates of 30%.”The level is expected to come down to 4-5% in the fourth quarter, he says.“There was pent up demand, but that has been released and is now pretty much done. There’s very little prospect of big stimulus, and then there’s the virus itself. All this suggests that the next few quarters are not going to be good."
Global GDP is forecast to shrink by 4.5% in 2020, before recovering to possible growth of 4.0% in 2021, according to Behravesh. While US GDP is expected to decline by up to 3.5% this year, GDP in the eurozone is forecast to plunge by 7.5%.“Europe has been much less aggressive [than the US] in terms of fiscal and monetary policy, and I think that has made a huge difference in the subsequent upturn, or lack thereof,”he says.
US GDP is expected to grow by 3.0-3.5% in 2021 and cross over to pre-pandemic levels during the first half of 2022, and the eurozone is looking at a crossover at the beginning of 2023, he says. The recovery in Europe will not be uniform, he notes. Germany is expected to return to pre-pandemic GDP levels in 2022 and Italy is forecast not to reach that point until 2026.