American Oil and Gas Reporter - January 2021 - 39

ADKINS: In March, most people thought we would see a
30% reduction in global oil demand in the April-May time
frame as all the lockdowns went into place around the world.
However, if you look at the actual global oil inventory numbers
during that timeframe, demand destruction at the peak in April
2020 was not nearly as bad as feared. The best I can tell, the destruction actually was about half of that 30% expectation.
That said, a demand loss of 15%-16% is still really ugly. It is
very rare to see a decline of even a few percentage points, but a
double-digit decline was unprecedented. So, while there was
still significant demand destruction, it was not as ugly as
everyone thought it would be. More importantly, the April
demand destruction was not nearly as bad as most analysts are
still assuming in their models.
Moreover, the recovery off of that lower bottom has been
extremely robust. By the start of December, demand had
recovered from being down from 15+ MMbbl/d at the low
point last spring to down less than 5 MMbbl/d. That's a pretty
stout rebound.
Even though demand has improved significantly from April
lows, there will be some element of permanent demand destruction
that precipitated from the Coronavirus pandemic related to
work-from-home, international business travel, etc. Specifically,
I am assuming a few percentage point reset, and oil demand
should then grow off the lower base going forward.
I think the die is cast for that growth, especially with pent-up
demand from people that were cooped up for the better part of
a year. The market is indicating in a range of stocks that it is expecting a very robust global economic recovery once the vaccine
is implemented on scale. Accordingly, I think people will be
surprised to the upside as to how quickly oil demand recovers
as we move through 2021.
Assuming the distribution of multiple vaccines,
how soon do you see total global demand
being restored to prepandemic levels? Could permanent
post-pandemic behavioral changes impact demand,
particularly for travel?

ADKINS: Our modeling shows global demand returning to
early 2020 levels of around 100 MMbbl/d in the back half of
2022. That said, I think we could see oil demand surge back to
reach 100 MMbbl/day as soon as late 2021. This view is based
on the optimism I'm seeing from other industries and other
economists regarding the pent-up demand. While possible, I
don't think it is safe to put a sharp demand rebound pace in the
model quite yet. Put another way, I am not predicting early
2020 oil demand levels by late 2021, but it is an upside
possibility in our modeling.
Let's talk about demand specifics. Over-the-road vehicle
traffic is actually up year-over-year in many cases around the
world, so there are encouraging signs. At the peak of the lockdowns, air travel was down 70% from the start of 2020. It was
only down 40% in early December, which was a surprisingly
healthy recovery given the circumstances. Again, it is still ugly,
but it indicates the degree of recovery that has taken place
already in the sector hardest hit by demand destruction.
There are a lot of swirling issues that will impact jet fuel demand. The biggest positive is the pent-up demand for vacation
travel, summer cruises, etc., as the vaccine takes effect. There

are a lot of grandmas who are going to want to go see their
grandkids. Also, as economic activity and global trade ramps
up, air transport of cargoes and goods will pick up as well.
The one main negative I see is business travel. People have
discovered that they can accomplish virtually a lot of what they
used to do in person. There likely will be some level of
permanent jet fuel demand destruction, particularly for international
business travel. With people learning how to communicate effectively using virtual platforms, companies have a substitute
for physical travel and can eliminate the expense of having employees on the road all the time. Will the positives of pent-up
demand for air travel be enough to offset the loss of business
travel? Probably not, but we will see.
The market had a supply overhang even before
COVID and the ballooning of storage inventories
last spring. How do you characterize the status of global
inventories at the start of 2021? When do you expect inventories to normalize within the five-year average?

ADKINS: The inventory picture is what the market consensus
misses most right now. If you look at pretty much any oil
model forecast, you will see it keys off the International Energy
Agency's historical demand data, which had much greater
implied oil demand destruction estimates than what we believe
actually occurred last spring and summer. Specifically, the
IEA data indicates that inventories built globally by 1.5 billion
barrels from the beginning of 2020 through May 2020. I
challenge anyone to find those oil and/or oil product inventory
builds. It simply didn't happen and none of the global inventory
data supports it.
So, although most oil models suggest global inventories
built 1.5 billion barrels in early 2020, if you look at the different
places crude oil and products can be stored, you will find that
only about half of that-750 million barrels-actually showed up
in global inventories.
While a 750 MMbbl surplus in May 2020 is still very large,
it also means that actual inventory levels that need to be worked
off are only half as big as most forecasts currently assume. That
is huge! One might say, " So what, that's history. Who cares
about the past? " It is important because it is the starting point to
determine when global oil inventories might return to normal
levels. More specifically, it impacts both the timing and pace of
the recovery in oil prices.
Think of the surplus inventory as a hole we dug last spring
by putting too much oil in the system. That market has to climb
out of that hole by working though that surplus. I believe the
hole is only half as deep as the IEA data and most models
suggest. If the hole is only half as deep, then we are working
through the excess much more quickly than most understand.
In fact, I believe the world has already worked down about 50%
of the 750 MMbbl of surplus built up in the first half of 2020.
Think about this . . . Globally, " oil on the water " floating inventories grew by 225 MMbbl between March and May. From
May to December, those same inventories had already fallen by
320 MMbbl. Put simply, the path to getting back to normalized
oil and oil product inventories, is much shorter than most think.
Specifically, our model shows global inventories returning
to the " normal " range in the second quarter of 2021. At that
point, the consequences of degraded supply capacity and rising
JANUARY 2021 39

American Oil and Gas Reporter - January 2021

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