The effects of the Covid-19 pandemic have put a strain on fuel markets and exacerbated many of the longer term challenges facing fuel suppliers. As demand has declined, a significant excess supply capacity has appeared in all markets, with little certainty on how quickly this overhang will be absorbed. Investment budgets are strained, prices are lower, and investors are looking at the fossil fuel sector with increased scepticism, driven by concerns about financial returns and uncertainty around demand, and also by doubts about business models against a backdrop of growing social and environmental pressures in many countries.

In oil markets, the recovery in demand in the Stated Policies Scenario (STEPS) requires that upstream investment picks up from the low point in 2020, underpinned by a rise in the oil price to $75/barrel by 2030. However, it is not clear whether this investment will come in time and, if it does come, where it will come from. The US tight oil sector has been the main engine of supply growth in recent years, but it was fuelled by easy credit that has now dried up. Meanwhile conventional producers are also feeling huge strains from the collapse in prices and revenues. Inventories are high and markets are well supplied in the near term, but the prospects for continued ample supply to meet the projected demand rebound in STEPS over the period to 2030 should not be taken for granted.

In the STEPS, US tight oil output returns to 2019 levels by 2022, while the prospects for conventional producers also depend on their resilience to the effects of the crisis. Low cost producer countries with larger financial buffers, such as Saudi Arabia, Russia, Kuwait and the United Arab Emirates, are better placed to weather the storm. Other producers, such as Iraq, Angola and Nigeria, face acute fiscal difficulties and struggle in the STEPS to mobilise upstream investment.

Refinery throughput grows at only half the pace seen in the last decade, and refineries are further challenged by a structural shift in oil use away from transport fuels and towards petrochemical feedstock. The widening gap between capacity and demand for refined products puts huge pressure on older and less competitive refineries. Hedging strategies for refiners include diversification into petrochemical and low-carbon businesses; these strategies become even more essential in the Sustainable Development Scenario (SDS).

This year’s projections for natural gas in the STEPS see a 2% downward revision in 2030 demand compared with the 2019 projections, similar to oil but much smaller than the downward revisions to 2030 demand for coal (9%). Shale gas production in the United States bounces back relatively quickly in this Outlook, but Qatar and Russia are also well placed for supply growth, given their vast reserves of low cost supplies.

Global gas markets remain amply supplied until the mid-2020s in the STEPS, maintaining downward pressure on prices during a period in which around 150 bcm of LNG contracts worldwide are due to expire. A delayed recovery from the pandemic cuts into near-term demand for LNG, while the downside case over the longer term arises from stronger climate policies. In the STEPS, new LNG projects get the go-ahead to start operation before 2030 to meet rising demand for internationally traded gas, but these are not required in the SDS.

Lower demand exerts sustained pressure on the coal supply industry. International coal trade is further squeezed by efforts to boost domestic output in China and India – the two largest coal importing countries. India is the only country that sees growth in coal production in the STEPS, with Australia and Russia faring better than the other exporters. The SDS intensifies the pressure on all coal suppliers.

Renewable solid biomass, liquid biofuels and biogases grow steadily in the STEPS thanks to various mandates and targets, underlining that policy support is a critical variable for low-carbon fuels, especially in a lower fossil fuel price environment. Today’s levels of spending and investment need to rise to deliver the policies announced by governments that are reflected in the STEPS; they would need to rise much further to deliver the more ambitious goals of the SDS.

Low-carbon hydrogen is rising in importance in many energy transition strategies, and several countries are accelerating efforts to scale up infrastructure, demand and expertise. Bridging the cost gap with competing fuels is a key near-term challenge, but the gap is projected to narrow considerably by 2030.