Fuel demand to remain depressed in H1

MANILA, Philippines — Global demand for fuel will remain depressed for the rest of first half and is seen to recover in the second half as economies start to open up amid the coronavirus disease 2019 or COVID-19 pandemic, according to Moody’s Investors Service.

In its latest report “Recession and uncertain demand recovery weigh on oil prices in 2020-2021,” Moody’s said the global refining and marketing sector is suffering from lower demand for refined products as the COVID-19 pandemic has stalled economic activity.

The sharp drop in demand for oil products globally—as economies shut down in March and April—has knocked oil markets severely off-balance, sending oil prices into a dramatic plunge.

Moody’s said oil refiners and marketers are expected to register lower profits and higher working capital, which will severely reduce their cash flow especially in the first half.

“Demand for gasoline and jet fuel has plummeted, while diesel use has held up better. Refinery utilization rates have declined and some facilities have been idled, but refined-product inventories continue to increase,” it said.

“Unit profit margins have deteriorated at the lower utilization rates, and refiners’ total cash flow has suffered. Refiners’ crack spreads have been weak, and lower oil and natural gas prices have not offset weak product prices or lower sales volumes,” Moody’s said.

At home, oil companies such as Petron Corp. and Pilipinas Shell Petroleum Corp. are not spared from the global crisis as they manage losses from keeping idle oil stocks in storage facilities.

However, Regina Capital Development Corp. Business Development head Luis Limlingan said these listed oil companies are not the only ones reeling from the impact of COVID-19.

“It’s across the board and not isolated to the oil companies,” he said.

The enhanced community quarantine imposed in Luzon and other provinces halted public transport and effectively reduced fuel demand.

Oil companies have a minimum inventory of 30 days for combined supply of crude oil and finished products, and household LPGs have a supply for at least seven days.

Based on data from the Department of Energy, LPG stocks are currently good for 16.4 days, while the combined finished products are enough for 29.17 days and crude oil for 22.2 days for a total of 51.37 days.

But as consumption of refined products such as diesel, bunker fuel and jet fuel are expected to remain weak until mid-year, Moody’s expects a slow recovery in demand as countries start easing restrictions and reopening their economies.

“Refiners are focused on liquidity, having used cash to fund very large working capital outflows during the price downturn and building up high-cost inventories. Some reductions in borrowing-base facilities have left speculative-grade refiners with less available unused borrowing. We expect that working capital will be a source of cash in the second half (of) 2020 as the economy and demand recover,” it said.