Virus-related developments dominated the early part of yesterday’s trading as the week kicked off in a sombre mood. Oil prices fell on the back growing unease about healthy demand growth expectations. In a way the market reaction on surging cases in India and Japan is understandable considering that combined oil demand from these two countries is well over 8 mbpd, roughly 8% of total consumption and they chiefly satisfy their thirst from imports. In India hospitals are overwhelmed and many of them ran out of beds. The country recorded a new global high for Covid cases for the fifth day in a row and lockdowns have been re-introduced. In Japan, a three-week state of emergency has come into force in four of the country’s prefectures. Oil consumption is bound the fall temporarily, refiners will cut their utilization rates and oil imports are consequently expected to suffer in the foreseeable future in these two important demand centres.

The malaise was magnified by the lifting of the Libyan force majeure. The country’s National Oil Corp settled its dispute with the government and is now expected to receive $225 million as part of the agreement to resume oil exports. Output, which has fallen by 300,000 bpd to 1 mbpd is now set to rise gradually. The Brent structure started to weaken yesterday. The M1/M6 spread lost 26 cents/bbl on the day.

Regional demand destruction and output recovery is the recipe for lower prices. The market was clearly affected by these developments in the early part of yesterday, but the sentiment turned in the afternoon. Judging by the rally the devastation in India and mobility restrictions in other parts of the world (Turkey has announced its strictest pandemic restrictions, so far) are not expected to have long-lasting negative economic impact. This is what OPEC, and its allies are predicting. Although the struggle against the virus is a cause for concern the group’s Joint Technical Committee forecasts an annual global oil demand growth of 6 mbpd and expects oil inventories to fall back to the pre-pandemic level by the end of the second quarter. The ultimate objective, the 2015-2019 OECD average will be only 8 million bbls above the end-quarter stock level. These estimates a.) will make the ministerial meeting a formality (it has been brought forward to today) and the gradual increase of 2.1 mbpd over the coming three months will be confirmed and b.) have implied that not just the battle but the war against Covid will have been won by the second half the year. But the road to victory is still some way off and volatility is to prevail in weeks to come.

A future alternative

We pointed out in yesterday’s note the impact the coronavirus had on peak oil demand. The consensus now is that the world’s thirst for the black stuff will reach its summit earlier than previously projected. The range varies widely but this does not change the fact – energy transition is under way and the race to dominate the energy mix is on. The main contenders are solar, wind, hydro, tidal, geothermal and biomass energy. Lately, however, a forgotten entrant, hydrogen is re-gaining previously lost ground.

Hydrogen is viewed as an alternative fuel. It is light, dense, storable and produces no emissions. It is used by the refining sector to lower the sulphur content of fuels. It treats metals, produces fertilizers, and processes food. Its broader contribution to the energy transition, however, depends on whether it can be utilized in sectors such as transport or power generation. The advantages of hydrogen in transport, for example, are its ability to power fuel cells in zero-emission electric vehicles, its fast fuelling time and its efficiency compared to internal combustion engine. It can be produced from a number of resources. Thermochemical processes can use heat and chemical reactions to release hydrogen from fossil fuels, biomass, and other organic materials. Water can be split into hydrogen and oxygen with the help of electrolysis. Even microorganisms are able to produce hydrogen through biological processes.

For the past 60 years hydrogen has always had the potential to replace fossil fuel as the primary source of energy but it has not lived up to expectation, chiefly because of its high cost. The intensifying fight against global warming, however, has provided a fresh impetus to this energy source.

There are four different types of hydrogens characterized by the methods it is produced: brown, grey, blue and green. Brown hydrogen is produced from fossil fuels. It is currently the cheapest way to make hydrogen but also the most damaging to the environment. Grey hydrogen has been produced for a long time. Natural gas is split into hydrogen and CO2, but the latter is not captured and stored. Producers of blue hydrogen also use natural gas, but the carbon emission is not released back to the atmosphere. Due to the costs of capturing and storing CO2 on scale the production of blue hydrogen is insignificant. Green hydrogen is produced by separating water into its component elements, hydrogen and oxygen, through electrolysis. This process is powered by renewable energy such as wind or solar. Hydrogen is retained and oxygen is released with no harmful impact.

Although producing green hydrogen is currently a very pricey process momentum is building up around it. Wood Mackenzie estimates that by 2040 green hydrogen will be cost-competitive due to the reduction in renewable prices and the rise in the price of brown and grey hydrogen. Investors are taking meaningful strides towards green hydrogen. Saudi Arabia is building a green hydrogen plant that is reportedly the world’s largest project of its kind and is planned to power the $500 billion idea, Neom City. In Europe green hydrogen was the biggest beneficiary of Germany’s clean energy stimulus programme. Energy Intelligence noted that oil majors and downstream companies have started to work on strategies that would replace grey hydrogen with green hydrogen. Although the use of green hydrogen is still in its infancy and there are numerous obstacles to overcome before it is widely accepted and used its future role in the energy transition must not be ignored or discounted.