Why oil prices aren’t expected to see a quick recovery from a more than 20% loss in 2020

he year 2020 has been unlike any other, with Covid-19 economic restrictions hitting oil demand hard and OPEC+ disagreements contributing to a plunge to negative prices. But the rollout of vaccines in the U.S. and Europe offers hope for a fresh start in the new year.

“2020 was a year that proves that there is no such thing as 20/20 vision when it comes to forecasting energy market pricing,” noted Dan Klein, head of energy pathways and analytics at S&P Global Platts, during a recent energy outlook briefing. “There will undoubtedly be unforeseeable twists and turns over 2021 that will bring even more risks to the forecasts.”

Oil futures are on track to end the year significantly lower, as the pandemic’s economic restrictions reduced energy demand. West Texas Intermediate crude is down nearly 21% year to date after settling on Dec. 17 at $48.36 a barrel, according to Dow Jones Market Data. Brent crude oil BRNG21, +0.21% BRN00, +0.21% stands at $51.50, set to lose almost 22% this year for its biggest yearly loss since 2015.

“The year-over-year drop in oil prices feels appropriate,” said Cailin Birch, global economist at the Economist Intelligence Unit, or EIU, which estimates that global oil demand will fall by nearly 8.5%, to 91.7 million barrels per day, in 2020.

The second-quarter crash in demand was “exacerbated by a surge in supplies,” as the alliance between members of the Organization of the Petroleum Exporting Countries and other major producers, including Russia, was “taken to extremes,” she said.

Key OPEC member Saudi Arabia “took a big gamble in March when it launched a brief but brutal price war against Russia,” she says, after the OPEC+ group failed to agree on production volumes in the face of the pandemic.

The oil price war contributed to a drop in WTI crude prices to a negative $37.63 on April 20. That “caught many traders and brokerage firms off guard, and many needed to adjust their risk-management models,” said Phillip Streible, the chief market strategist at Blue Line Futures. However, the bottom for prices, he says, is “behind us…and higher prices are ahead.”

“OPEC [overall] has done an excellent job handling the pandemic by curbing production when needed and slowly adding to supply as demand justifies it,” Streible said.

OPEC+ reached a deal earlier this month to pare current production cuts of 7.7 million to 7.2 million barrels per day starting in January, essentially lifting output by 500,000 barrels a day. The group otherwise would have relaxed output curbs to 5.8 million barrels, raising output by even more.

Birch expects the OPEC+ deal to remain in place next year. “Some countries’ compliance will start to weaken after the first quarter…as demand starts to recover,” but OPEC+ will probably “tolerate” that softer compliance “in the interest of preserving the broader deal.”

EIU expects the global economy to make a partial recovery in 2021, with real gross domestic product rising by 4.5% year on year. But the pace of oil-demand recovery will probably be slower, with global demand recovering to pre-pandemic levels only in 2023, said Birch.

“We do not expect to see a second significant jump in oil prices…until vaccination rates begin to rise,” Birch says. Brent and WTI crude are expected to climb “marginally” in the first half of 2021, then move up more quickly in the second half of the year.
Credit: MarketWatch

Gh Extractives

Ghextractives.com is an independent multimedia portal that seeks to provide credible information and news content to readers especially players in the extractive sector in Ghana, Africa and beyond. It also provides a unique platform for players in the energy sector to market their products and reach a wider audience

View All Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.