North America (notably the lower US states), the Middle East and Southeast Asia will be hit relatively harder, Rystad Energy’s modelling shows.

The rise of Covid-19 cases in the US is of particular concern for the oil market given the country’s high oil consumption under normal circumstances, as this second wave could paralyze road fuel demand. In China, the authorities’ response to the recent case resurgence in Beijing shows that re-imposing radical lockdown measures is still a viable option.

“Covid-19 will also re-emerge in other regions in our ‘second wave’ scenario when the flu season starts in the northern hemisphere in September and October. In general, however, new waves of lockdowns in regions such as Europe, South America and Russia are expected to be more targeted and less strict as health systems will be better prepared than they were in April,” says Rystad Energy’s senior oil market analyst Artyom Tchen.

The demand for total oil products would not be shared equally. Similar to the current status quo, jet fuel and gasoline would be dealt the most painful blows. But with more testing and smarter lockdowns, a lot of this destruction can be avoided – international borders and travel can gradually reopen, with travel restrictions on certain countries and regions being imposed as new Covid hotspots appear.

More work from home (perhaps as much as 15% of the workforce in developed countries) and less leisure travel will still pinch gasoline demand. But as the economic risks mount, we believe there will be creative solutions for the healthy and not-at-risk parts of the population to return to work and keep the economy going.

The second wave scenario assumes a prolonged recovery in the aviation sector due to the downside risk of such a wave occurring in the second half of 2020 and a second negative demand impact spike in all regions in the period from August to October 2020. It is in essence an expansion of a downside scenario that we previously modelled called a “mitigation scenario”.

In the base-case that we use for our projections, which we call the “effective retainment scenario”, the spread of Covid-19 is plotted under the assumption that drastic social distancing measures are initially taken, which often means strict quarantines. This scenario suppresses the virus so that the number of cases drops to a low level. Governments can then reopen society in a controlled manner. Any new outbreak will be again nipped in the bud with strict measures.

The difference between the two scenarios by the end of the year shows a 5 million bpd gap in December’s oil demand in the case of a second Covid-19 wave. If the second wave materializes, global oil demand will recover much more slowly in 2021, landing between 4 million and 5 million bpd lower per month than it would under our current base case, thus dragging the pandemic’s market effect further in time.

What about prices?
Demand is still very much in the driver’s seat in setting the oil price agenda – an unexpected dip of any magnitude will send the oil price into a tailspin, whether swift and sharp, or long and painful. At this point, OPEC+ is the single supply tool to materially tighten the market, but it faces massive storage build-ups as an adversary. And if there is a second wave, that storage headache is going to greatly worsen as implied builds again rise.

A significant oil price boost cannot occur until the massive crude stock builds of recent months are neutralized. This means that oil prices will continue to carry considerable downside risk as long as the supply and demand dynamics are moving in opposing trajectories – with supply up and demand down. A second wave of the virus would prolong the timeline these products sit in storage, and signal to refineries to pull back. 

If anything, the whole new range of risk factors that still lie ahead in 2020 and 2021 would actually point to more volatility and downside risk before any “flip” back into a true backwardation happens.