Oil still remains on a bumpy path to recovery despite price swerve

London

OIL just experienced its biggest one-day price slump in more than six months, but it hasn't veered off the road to recovery.

Even as problems with Europe's vaccine programme and a slowdown in Chinese crude buying sent futures down 7 per cent last Thursday, data from around the world showed a steady, albeit patchy, recovery in demand.

A year ago, idled jetliners were parked wing-tip to wing-tip on airport taxiways as a raging virus kept billions of people at home. Today, US airports are the busiest since the pandemic started and flight attendants are returning from furlough.

These steps back towards normality from one of the industries hit hardest by Covid-19 is just one of many signs that the world is starting to move again. Consumption of petrol, diesel and jet fuel are at the highest in more than a year.

The market's jitters may still be justified. A renewed lockdown in Italy showed that any gains can be quickly lost if the spread of the virus accelerates again. Yet things are likely to keep improving through the summer, traditionally the peak period for oil demand.

More than 410 million vaccine doses have been administered across 132 countries. US President Joe Biden just signed a US$1.9 trillion economic rescue package into law, prompting analysts to significantly upgrade their growth forecasts.

"Western world oil demand looks set to bounce on the back of the economic recovery, stimulus, vaccination progress, and easing pandemic measures," said Norbert Ruecker, head of economics and next-generation research at Julius Baer. "Europe's vaccination hiccups hardly change the economic outlook."

Global oil demand, which plunged as much as 30 per cent during the worst of the pandemic lockdowns last March and April, is now back at about 95 per cent of the pre-Covid high of just over 100 million barrels a day hit in 2019, according to the International Energy Agency. Together with aggressive output cuts from the Opec+ alliance of oil exporters, that's helped a revival in prices of more than 20 per cent this year - even after Thursday's slump.

Commercial flights are back at two-thirds of comparable pre-Covid levels, the most activity since air traffic slumped a year ago, according to data from Flightradar24.

In the US, foot traffic in airports has picked up, with a run of over one million daily passengers for eight straight days ending on Thursday - something that hasn't happened since the pandemic started.

In another indication of renewed optimism about travel, the flow of petrol and diesel from refineries on the US Gulf Coast to Mexican ports accelerated from February into March as the Latin American country's resorts prepared for an influx of tourists over spring break, according to shipping data compiled by Bloomberg.

In China, air-passenger volumes climbed to 23.9 million trips in February, nearly three times the level of a year earlier, when the initial stages of the pandemic had grounded most of the country's jets, according to the local civil aviation administration.

Asian jet fuel demand should see a gradual improvement over the course of 2021, largely driven by domestic flights, said Sri Paravaikkarasu, Asia head of oil at FGE.

But it's a long road to full recovery for the market. Europe's air traffic has been higher than forecast, but is still languishing at about a third of pre-pandemic levels, "Even with the rapid mass distribution of the vaccine, it will require months for borders to fully open," Mr Paravaikkarasu said. "Given the cautious approach to reinstating international flights, Asia's jet fuel demand should only recover to pre-pandemic levels by 2023."

Total vehicle miles travelled on US highways in the week ended March 14 were down 9 per cent from a year earlier, according to data from the Department of Transportation.

Demand growth in Latin America has been constrained by slow vaccination progress and widespread infections in the region's two largest economies, Brazil and Mexico.

Many European drivers are still staying at home. Road journeys during London's peak morning commute are now taking longer than they did on average at the same time in 2019, while in Paris and Berlin delays are back at more than 70 per cent of pre-pandemic levels.

But in Madrid, congestion is still at less than 60 per cent of comparable 2019 levels, while delays in Rome have fallen back to just a quarter of those experienced before the pandemic.

"Traffic levels collapsed in parts of Italy as the government reimposed travel restrictions to contain the latest wave of Covid infections," according to a report from BloombergNEF. "The recovery continues, however, in the UK and Germany."

China continues to lead Asia's rebound. Morning rush-hour delays from Beijing and Shanghai to Wuhan and Chongqing are longer than average 2019 levels for the same time of day, TomTom data show. Petrol usage was 3.2 per cent higher in those months, extending a run above pre-Covid levels, according to consultant SIA Energy.

Some countries, notably Japan and South Korea, are lagging that revival. Japan's petrol demand may drop 2 per cent to 3 per cent in 2021, Tsutomu Sugimori, head of the Petroleum Association of Japan said last month. Refiners in South Korea and Taiwan have been operating well below capacity amid weak domestic and exports demand, and minuscule processing margins.

US demand for diesel for trucking remains well above spring 2020 levels as homebound Americans favour online shopping and delivery. Trucking mileage in the week ended March 14 was up 6 per cent from a year earlier, according to the Department of Transportation. The volume of distillate fuels supplied to the market rose to the highest since December 2019 in the week to March 5, according to the Department of Energy.

In China, a similar trend emerged as people chose to stay at home during New Year celebrations instead of visiting their families. The postal service collected and delivered over 660 million parcels during the holiday, almost three times more than the same period last year, data from the Ministry of Transport showed.

Diesel consumption in China was up about 10 per cent over the first two months of 2021 compared with the same period in 2019, according to SIA Energy. BLOOMBERG