DRAFT COVID-19 and OPEC+ Short term oil and liquids demand ... · 101.2 Mbpd 2020 (baseline) Global...

D R A F T

May 2020

COVID-19 and OPEC+

Short term oil and liquids demand and supply scenarios

2COVID-19 and OPEC+_IMCA2020LON

As oil and liquids markets absorb COVID-19/OPEC+, short term scenarios help

business planning

• Oil markets are being severely disrupted by COVID-19 and the actions to mitigate its spread.

Magnitude and speed of demand destruction is unprecedented. OPEC+ have defined an initial plan

to constrain an oversupplied storage infrastructure and market

• Bain’s scenario approach focuses on major disruptions that can drive different industry

outcomes. In this case, short-term dynamics are being disrupted by unprecedented demand

destruction and plausible supply responses to potential storage constraints and prices

• COVID-19 has such a dramatic impact on demand that we started there and devoted our first

webinar to three demand scenarios

• Scenarios are developed in the service of answering questions critical to business planning:

Depth and length of the downturn? OPEC+ and major producer supply responses? Timing and

duration of potential storage constraints? Different pricing mechanisms during the recovery?

C O N T E X T


Short term oil and liquids demand scenarios, COVID-19 impact

Five pathway archetypes20 countries, nine sectors Three envelope scenarios

• Observed all available data

(baseline, and COVID impact)

for the largest 20* countries

(>75% of global oil demand)

• Mix and impact on 9 demand

sectors (industry, cars, truck

freight, air freight, passenger

flights, ship, rail, buildings, and

non-energy) by country, RoW

• Identified 5 pathway archetypes

with a different demand

destruction, trough and

recovery profiles for each

• A country/market’s pathway will

have a huge impact on the

shape and size of demand

destruction, focus on 2020 and

into 2021

• Not all demand pathways are

likely available in every country,

but countries and RoW have

alternative outcomes

• Our three plausible scenarios

are based on country fit to

pathways and link to Bain’s

**Marco Trends Group Covid-

19 economic outcomes,

*US, China, India, Japan, Saudi Arabia, Russia, Brazil, South Korea, Canada, Germany, Iran, Mexico, Indonesia, UK, France, Thailand, Singapore, Spain, Italy, Australia

** Bain Marco Trends Group https://www.bain.com/insights/topics/coronavirus/

B A I N A P P R O A C H

https://www.bain.com/insights/topics/coronavirus/


Start point: Archetype pathways with to areas of material uncertainty

Months

Oil & Liquids demand (indexed to 100)

Oil

demand

decline

Trough Recovery Stabilization

A C

B

D

E

Period of demand

decline

Total months

to reach

troughA

% Mbpd from

pre-virus

normal

Aggregate drop in

demand vs. baselineB

Period of troughTotal months

in troughC

Period of recovery

Total months

to reach new

normal

D

Stabilization level vs.

baseline

Total % Mbpd

from baseline

after recovery

E

Stable growth rate

vs. baseline

New growth

rate compared

to baseline

F

F

I L L U S T R A T I V E

A F

A R C H E T Y P E P A T H W A Y S


Bain global oil and liquids demand scenarios developed from market/country

pathways describe a ~9 to 20% aggregate demand reduction vs. the 2020 baseline

What you would have to believe

• ‘Faster recovery’: US, India, China

effectively contain the virus (pathway 2);

oil demand recovers by end of Q2. Major

European economies delay containment

(pathway 3), but recover by end of 2020.

• ‘Moderate recovery’: China effectively

contains spread (pathway 2); developed

economies (US, Europe) need longer-

run partial lockdowns to recover by end

of 2020 (pathway 3); emerging markets

struggle into 2021 (pathway 4)

• ‘Slower recovery’: virus reemerges in

China (pathway 4) and continued spread

in developed markets leads to deeper

economic impact into 2021 (pathway 4).

Some emerging markets institute long-

run lockdowns but ultimately are forced

to let the virus run its course (pathway 5)

P R E L I M I N A R Y

Note: 2020 baseline based on 2017 and 2018 growth projections

101.2 Mbpd

2020 (baseline)

Global oil and liquids scenarios 2020 full year demand vs. baseline

~(9) Mbpd

~(13) Mbpd~(20) Mbpd

“Faster recovery” “Moderate recovery” “Slower recovery”

G L O B A L D E M A N D S C E N A R I O S


Oil and liquids demand decline by end use segment and scenario

Insights

• ‘Faster Recovery’: deep

15-20% trough of total

demand, recovery

relatively swift and global

demand is almost back

to baseline by Q4 2020,

except aviation

• ‘Moderate Recovery’:

presents the industry

with a severe and longer

trough of over 20% lower

demand and sluggish

recovery into 2021

• ‘Slower Recovery’: slow

recovery with quasi-

command economy

structure and 25-30%

GDP destruction

P A T H W A Y O U T C O M E S I L L U S T R A T I V E

“Faster

recovery”

“Moderate

recovery”

“Slower

recovery”


Reading the future demand signposts will give a directional sense of direction, inform

choices and (potentially) trigger the re-definition of a new set of scenarios

D E M A N D S I G N P O S T S

Moderate

Recovery

Slower

recovery

Faster

recovery

Today

Future

Scenarios with more

better-case themes

Scenarios with more

worse-case themes

Days

Weeks

Months

Signposts… …can be read at trigger points over time… …to indicate direction

Good strategy under uncertainty allows a company to move faster than others based on reading the signposts

S I G N P O S T S N O T E X H A U S T I V E

Public response, e.g.

bans on travel, movement,

social behavior changes

Virus reaction, e.g.

hospitalization rates,

new hot spots,

new effective treatments

Economic impact, e.g.

unemployment, GDP,

actual sector demand

Nationwide

lockdowns

Weaker gov’t

response or

compliance

Hospitalization

rate decreasing

Continued

exponential

spread

Continued

growth, but

slower

Flight miles and

passenger car

miles “bounce”

Continued

furloughs

Employers begin

re-hiring at scale

S I M P L I F I E D


Demand side observations

• Develop bespoke scenarios solving for the market outcomes that matter most to you

– Aim to understand the plausible range of what could happen – not a point specific “planning case”

– Define signposts and leading indicators to track speed and direction of macro- microeconomic evolution

– Set trigger points to facilitate rapid and thoughtful response to unfolding events

• Consider how all signposts and trigger points should influence all aspects of your business

– It’s about strategic moves, investments, and cost reductions

– and stakeholder & investor communication plans, human capital crisis response plans, and the rest

• Plan now / act now. Start thinking about how “temporary” ways of working and reactive cost cuts could

translate into permanent, structural improvements in efficiency and effectiveness.

– Right size the organization; prepare for “new normal” at a market and end use segment level

• Prioritize your portfolio (assets / business lines / geographies) ruthlessly – build around positions of

(potential) leadership economics

– Focus M&A / divestitures to concentrate scale where scale matters most (not just to consolidate)

O B S E R V A T I O N S


Depending on demand shock severity, we expect the sustainable recovery window

between Q2 2020 most optimistic, and Q4 2021 in the most negative

I N T E G R A T E D D E M A N D A N D S U P P L Y S C E N A R I O S


Demand

Supply

Short-term, severe but disciplined

correction, risk of accelerating too fast

Deeper and longer shock, storage

constraints hit, drive need for greater

action and significant shut-ins

• Global storage capacity holds, just…

• Supply drawdown, returns and new

additions required as of Q3 2020

• Will likely hit global storage capacity in

~3 months

• Supply additions required in Q1 2021

• Will likely hit global storage capacity in

~2 months

• Supply additions not required until late

Q3 / Q4 2021

Protracted demand loss, insufficient

and unmanaged supply constraints

drive fragmented reactions and

widespread shut-ins

Demand

Supply

Source: Rystad; Bain


Weaker oil price through the crisis, but planning cases vary significantly by scenario

O I L P R I C E P L A N N I N G I M P L I C A T I O N S

Half-cycle cost curve

(~$35-45/bbl)

Short-run

marginal cost

($10-25/bbl)Half-cycle

cost curve

(~$35-45/bbl)

Short-run

marginal cost

($10-25/bbl)

Short-run

marginal cost

($10-25/bbl)

Shut-ins ($10-15/bbl)

Shut-ins

($10-15/bbl)

Note: Price bands are based on Brent oil price and adjust for regional differences in Brent

Source: Macrotrends, Rystad, Bain

• Overall, price and market mechanisms

based on cost curves are still at work

• While storage is building (to Q3), short-

run marginal cost (production OpEx)

sets the pricing band

• Once additional production is needed

(Q3), and the half-cycle cost curve (to

induce new drilling) takes over…

• …but the pricing build will be slow,

held back by storage draw & OPEC+

• Traditional market mechanisms begin

to break down in order to force shut-ins

• Shut-in economics are complicated,

and highly asset/operator specific

• Severe pricing impact will vary locally to

induce mass shut-ins; netback prices

break connection to benchmarks

• New drilling likely in Q1/Q2 of 2021,

but prices and activity held down by

shut-in reversals, storage draw, OPEC+

• Global benchmark prices generally

lose relevance as production decisions

mainly driven by non-economic factors

• Lack of storage capacity induces shut-

ins earlier, with more price pressure

earlier

• Protracted demand loss, with reversals

of shut-ins able to supply all incremental

production until at least late 2021

• Significant structural damage to assets,

balance sheets, fiscal regimes



Integrated demand/supply scenario impacts on production capacities: US / Canadian

production likely hit hardest in slower recovery scenarios

Insights

• OPEC+ cuts account for roughly

6M bpd, on average, in each

scenario. Additional cuts required

with Moderate to Slower recovery.

• Storage capacity provides an outlet

for excess oil supply, but likely not

sufficient to avoid further shut-ins

• Moderate to Slower recovery, the US

and Canada (with non-OPEC

countries) likely to see significant

shut-ins.

• IOCs, independents increasingly

impacted in tough scenarios.

Balance sheet and local demand

factors will be a differentiator in an

intensely competitive landscape.

I N T E G R A T E D S U P P L Y S C E N A R I O S

Production cuts – impact by player / oil type / country

“M

od

era

te

rec

ove

ry”

“F

as

ter

rec

ove

ry”

“S

low

er

rec

ove

ry”

Legend

Players:

Oil types:

Country:

NOC

IOC

Other

DW

Offshore

Onshore (conv)

Shale

Oil sands

OPEC+ US / Canada

Other

D I R E C T I O N A L

Source: OPEC, Rystad Energy, Bain Analysis


Oil & liquids scenarios, key questions and implications for the industry

Q & A

• How long and deep do we expect the

downturn to last and when do we

return to a “new normal”?

• Who is exposed to potential supply

reductions? What are impacts on the

price setting mechanism?

• What are the right signposts to

navigate by in the midst of uncertainty?

• How to anticipate lasting structural

changes to demand, supply and price?

Return as soon as mid Q3 2020 or as late as Q4

2021, signposts indicate we are closer to

scenario 2 would imply mid Q1 2021 from a Q2

2020 -20Mbpd trough

Scenario 1 OPEC+ cut foundation, increased cuts

required across the industry moving to 2 and 3.

Price follows but in 3 local economics overwhelm

Local segment demand will be the key indicator

for oil and liquids demand fall and recovery,

transport and especially car/trucks

If the industry can remain in bounds of 1 and a

managed 2, basic industry structure, economics,

price mechanisms can hold, in scenario 3

anticipate / plan for radical change

• [email protected] Partner, Head Global Oil & Gas Consulting, Milan

• [email protected] Advisory Partner, Global Oil & Gas Practice, Houston

• [email protected] Partner, Global Oil & Gas Practice, Houston

• [email protected] Principal, Global Oil & Gas Practice, London

For further information please contact:

mailto:[email protected]




DRAFT COVID-19 and OPEC+ Short term oil and liquids demand ... · 101.2 Mbpd 2020 (baseline) Global...

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