Permanent Damage To Oil Demand

[BradleyPNW + 282]

"But besides prices, Petrobras also said it expected permanent changes in consumer habits, resulting from the economic shock caused by the pandemic on a global scale. This reference to changed habits may imply changes in energy use and hence oil demand that would have a long-term effect on the industry."

https://oilprice.com/Energy/Energy-General/Petrobras-Expects-Permanent-Damage-to-Oil-Demand-as-It-Writes-Off-Billions-In-As.html

[BradleyPNW + 282]

IMO, consumer habits is one of the most interesting aspects of COVID. 

[0R0 + 6,251]

I don't know the balance. There are forces promoting short term increase in oil demand and intermidiate term increases and long term decline.

On the negative side is the end of commuting to the office, which has become virtualized and will disband the office support staff along with the core workers of major downtown office dwellers. CV19 blew away the myth of the wanker at home work at the office. Reported gains in productivity are coupled with the potential savings in real estate costs and avoidance of city income taxes. The move out of the central city downtowns is going to be massive. The employees will move out of the cities along with their jobs, making the city redundant. The real estate moguls are already on board. See Redfin and Sam Zell for some thoughts on the issue. That is a potential 4 mob/d lost, likely permanently.

The retooling of the housing stock to home offices, on the other hand, is a boon to contractors and their gas guzzling trucks, as well as the hyper acceleration of the move out of the cities which was already going on steadily for years. That means new construction spread out across the country and its associated infrastructure. For quite a few years, this will increase oil consumption. Of a WAG +1 to +2 MOB/d mostly depending on the funding cost of this  capital demand.

Before offices disband from downtowns, the willingness to take the subway is zero by the office workers. They will uber if their employers can't provide parking (they can't, it just isn't there). So in the interim, there will be a huge increase of commuter driving by those still working at the office. I don't know yet where the distribution will be between telecommuters and traditional commuters, now in individual cars. Assuming half and half, then this is +2 mob/d

We will know how that balances out according to the rush hour traffic as it returns with an extra vengeance, or doesn't ever resume the old levels of congestion..

The other Major thing is the duplication of the China industrial capacity in both the EU and the US zones and in SE Asia. It will be a large scale industrial capital  demand for oil and NG for electricity, along with a large rise in permanent consumption, at least of NG, if not both NG and oil. I estimate it as 3-4 mob/d..If the rush is on to do it, then the figure may be higher.

Air travel will take some time to recover, but it does not need to have social distancing if they work out the air system to have the personal air nozzles always working and deploy HEPA air filtration for their cabin recirculation. But initially, it is empty middle seats and half occupancy on small regional jets. If the spacing is retained, then it would mean lower flight energy efficiency to meet recovered demand. Ultimately it means MORE jet fuel demand if similar travel volumes resume. Unfortunately, much of the business travel is gone permanently. as conference and meeting practices have moved online permanently. So that is likely -3 mob/d.

Substitution of drives for flights is a big question, and may be a boon for oil consumption and motels throughout the fly over country, now turned drive through country. As long range driving is an order of magnitude less efficient than flying and roads don't have the capacity to handle that much traffic, that may take up the half of flying that people may substitute with driving, up to about +4-5 mob/d of potential increases in demand.

So short term I come up with 0 and intermediate term +3. All very much in question.  Long term it is still -20+30 Mob/d  lost mostly to NG substitution for diesel. It will be felt more in Brent and heavy crude prices than WTI prices. WTI may once again trade at a premium to Brent.

 

On the supply side, watch out for a premature restart of shale oil fracking.

https://www.rigzone.com/news/wire/shale_producers_eye_potential_fracking_revival_at_30_oil-05-may-2020-161986-article/

Webster: The U.S. rig count and shale production are showing rapid drops. Given the still-unbalanced market, it was surprising to still hear some small shale producers claim that a $30 per barrel oil price would be viewed as a go signal. This is unlikely – but if a slightly higher price boosts activity at the margin, we could easily see another price swoon.

[Ding Ray Chung + 8]

16 hours ago, 0R0 said:

I don't know the balance. There are forces promoting short term increase in oil demand and intermidiate term increases and long term decline.

Good points. However the biggest factors will be politics and macroeconomics.

In the US: Who will win the Presidential election? Biden victory will have a large negative impact: EV/renewable subsidies, CAFE standards, carbon taxes, etc.

in China: will CCP be able to revive the economic engine via state stimulation, given that prospects for the export sector seem dim?

In EM: will financial flows start flowing again to continue the industrialization trajectory or will there be a long-term freeze?

These are the main hinges for oil demand in the next 5 years.

[BenFranklin'sSpectacles + 762]

21 hours ago, 0R0 said:

The retooling of the housing stock to home offices, on the other hand, is a boon to contractors and their gas guzzling trucks, as well as the hyper acceleration of the move out of the cities which was already going on steadily for years. That means new construction spread out across the country and its associated infrastructure. For quite a few years, this will increase oil consumption. Of a WAG +1 to +2 MOB/d mostly depending on the funding cost of this  capital demand.

I'm not so sure about this.  Residential rooms are empty boxes; fill them with the right furniture, and they're an office.

In this case, the appropriate furniture consists of a desk and a chair, both of which any white collar worker has had since college. 

[0R0 + 6,251]

2 hours ago, BenFranklin'sSpectacles said:

I'm not so sure about this.  Residential rooms are empty boxes; fill them with the right furniture, and they're an office.

In this case, the appropriate furniture consists of a desk and a chair, both of which any white collar worker has had since college. 

Not quite.

The general need that is not met is separation from the household activities and the need to accommodate video. I.e. no mud covered dogs and kids passing in front of the camera or spouses in their skivvies. Sound isolation from the TV and the alien blasters, or kitchen noises and bathroom flushes..

[BenFranklin'sSpectacles + 762]

2 minutes ago, 0R0 said:

Not quite.

The general need that is not met is separation from the household activities and the need to accommodate video. I.e. no mud covered dogs and kids passing in front of the camera or spouses in their skivvies. Sound isolation from the TV and the alien blasters, or kitchen noises and bathroom flushes..

I think you're saying professionals will either create a new room or tear down the drywall in an existing room to insulate it.  Is that correct?

[0R0 + 6,251]

6 hours ago, Ding Ray Chung said:

Good points. However the biggest factors will be politics and macroeconomics.

In the US: Who will win the Presidential election? Biden victory will have a large negative impact: EV/renewable subsidies, CAFE standards, carbon taxes, etc.

in China: will CCP be able to revive the economic engine via state stimulation, given that prospects for the export sector seem dim?

In EM: will financial flows start flowing again to continue the industrialization trajectory or will there be a long-term freeze?

These are the main hinges for oil demand in the next 5 years.

Well, Biden is remarkably weak as a candidate. I don't know if he gets to the debates in good enough shape to have coherent replies.

In the blue states dominated by mega metros, the Democratic party is wildly popular in the city for the supposed "care" of locking down their people with absurd limits and spreading the disease among nursing home residents on purpose, while thousands die because of the lack of "elective" surgeries and treatments, people go blind because ophthalmologists are closed etc.. Meanwhile the middle and upper class residents and businesses are plotting their express move out of them. So that will color Dem loyalists' perceptions as their employers notify them of the office closing and the  business moving out of state. . .

Outside these areas, the Democratic party looks like malicious thugs and clowns. They may lose key state governorships and senators. As well as non-urban congressional seats, if the angry suburban and rural vote is turned out in force to the polls.

Trump will likely run on a "China Free" platform of reindustrialization of the US to "return jobs home".  With a vociferous message of detachment from China. It has a near universal support even among farmers who would be hurt by it.

 

The media and technology companies running anti Trump campaigns of their own, are facing threats of antitrust actions as retribution and a means of obtaining their internal documents and contacts regarding their one sided editorial policy and coordination with the DNC and specific Dem leaders and bureaucrats. Their connections to Chinese propaganda efforts directly and through China dependent American businesses will be on the campaign trail and a subject of investigations during the campaign.

 

The damage to oil production capacity is enormous.. The 12 million barrel per day reduction of production was not achieved with "cuts" from Saudi etc. large producers, but by the collapse - likely long term, of the many smaller ones and damage to marginal oil fields in Russia. While I expect US demand to resume most of its volume, I don't expect EU China or EM demand to recover as much. Those were demand challenged markets in EU China and SE Asia, after this shock, they will be more so . The EU mass retirement wave would have started in 2 years, Many of those workers who would be returning to high contact work are likely to try to retire earlier in order to reduce their chances of infection. That would bring forward the EU demand collapse that was coming. Similarly China and S E Asia face the same demographics and will likely suffer the same reaction, to the extent people can afford to retire.

 

In referring to SE Asia I am excluding the young populations of the Philippines and Indonesia.

I expect the Philippines Malaysia and Indonesia will get a green light from the US and Japan and Australia to have their people conduct piracy of Chinese shipping as Chinese trade volumes with them decline. .

[0R0 + 6,251]

43 minutes ago, BenFranklin'sSpectacles said:

I think you're saying professionals will either create a new room or tear down the drywall in an existing room to insulate it.  Is that correct?

Yes, rather their contractors will. But much beyond just sound insulation, Doors installed, additions, and most of all moving out of apartments into single family housing with a Den/office. Going by the effect of setting for people conducting business via Zoom etc. Their city apartments are just not conducive to it. The rooms are too small, the only available space is an open living room or dining area where all household activities affect it.

[BenFranklin'sSpectacles + 762]

3 minutes ago, 0R0 said:

Yes, rather their contractors will. But much beyond just sound insulation, Doors installed, additions, and most of all moving out of apartments into single family housing with a Den/office. Going by the effect of setting for people conducting business via Zoom etc. Their city apartments are just not conducive to it. The rooms are too small, the only available space is an open living room or dining area where all household activities affect it.

We'll get a few more contractors driving trucks, but each will only make a handful of trips per renovation.  Also, people will work from home before committing to a renovation.  I see two potential problems with your analysis:

1) I don't think contractors alone, driving vehicles they already drive, will increase fuel demand by 1-2MMbpd.  They're not driving all day; they're driving to the site, working all day, and then driving home - which they were doing already. 

2) The demand destruction from home offices will occur before the demand creation of the renovations. 

I think we'll see an immediate drop in demand.  After that, we might see renovation activity et al. holding demand steady at some lower-than-peak level.  Maybe.  After that, I think we'll see a steady decline. 

Thoughts? 

[0R0 + 6,251]

1 minute ago, BenFranklin'sSpectacles said:

We'll get a few more contractors driving trucks, but each will only make a handful of trips per renovation.  Also, people will work from home before committing to a renovation.  I see two potential problems with your analysis:

1) I don't think contractors alone, driving vehicles they already drive, will increase fuel demand by 1-2MMbpd.  They're not driving all day; they're driving to the site, working all day, and then driving home - which they were doing already. 

2) The demand destruction from home offices will occur before the demand creation of the renovations. 

I think we'll see an immediate drop in demand.  After that, we might see renovation activity et al. holding demand steady at some lower-than-peak level.  Maybe.  After that, I think we'll see a steady decline. 

Thoughts? 

Agree with your sequencing. But disagree about the travel of contractors, they are out on the road collecting and delivering construction materials and equipment a large portion of their time.

Also, it is a matter of scale. While boomer home workers will have empty nests, younger folks will have their houses and apartments well undersized for two work from home rooms. The sheer scale of migration and construction required is awe inspiring. It will be the 1960s all over again. Leaving central metro districts the kind of black holes they were in the 1970s.

[BenFranklin'sSpectacles + 762]

48 minutes ago, 0R0 said:

Agree with your sequencing. But disagree about the travel of contractors, they are out on the road collecting and delivering construction materials and equipment a large portion of their time.

Also, it is a matter of scale. While boomer home workers will have empty nests, younger folks will have their houses and apartments well undersized for two work from home rooms. The sheer scale of migration and construction required is awe inspiring. It will be the 1960s all over again. Leaving central metro districts the kind of black holes they were in the 1970s.

Fair points.  How long do you think that boom will last?

[0R0 + 6,251]

On 5/17/2020 at 4:08 PM, BenFranklin'sSpectacles said:

Fair points.  How long do you think that boom will last?

The rest of the decade..

This is an acceleration of an ongoing trend. 

Twitter recently announced to their workforce that the offices will be used only as necessary and most of the space will be released from contract. The workers are expected to continue their careers from their home offices. Many CEOs are expecting 30-40% or more of employees to never use office space again (not because they are fired)  .

The pressure to provide greater and more presentable home offices is growing and will continue to grow as people become sensitive to what shows up behind them on the Zoom videos and their old office space is gone so they have to do work meetings at their homes. .

[Chris Tarjeft + 22]

The work from home trend is dangerous.. in a capitalist economy work from home will translate into "work from overseas".  Employment figures will look ugly as sin domestically if more jobs are remote than "in office".