Oil: towards a fragile rebound in 2021

Posted on Dec. 2020 at 9:00

2021 will be the year of the rebound for the oil markets. After a historic year 2020, marked by the collapse in the price of the barrel, most indicators are green and call for a rise in prices next year. Fuel consumption has not yet returned to normal in North America and Europe, but it is not very far from it, despite the re-containment decided in most Western countries.

Sales of petrol and diesel have returned to their pre-crisis levels in China and Japan, the second and fourth consumers of black gold, respectively. In India, Indian Oil announces that its refineries are operating at full capacity. And the record surpluses that have accumulated in tanks around the world since spring are finally receding. “Stocks are falling”, say MUFG analysts.

Faster than GDP

The 2020 crisis was exceptional for the oil market because it disproportionately penalized mobility, and therefore fuels. Oil consumption has fallen 1.6 times more than GDP, Citi experts calculated, while the ratio of demand for crude to the economic downturn has historically been 0.4 on average. “It is therefore reasonable to think that demand will recover faster than GDP in 2021 while mobility improves”, they write.

The echoes

Some experts are particularly optimistic. For MUFG analysts, global consumption could return to 100 million barrels per day, the level before the pandemic, by next summer. The International Energy Agency is more cautious. It forecasts an average consumption of less than 97 million barrels per day in 2021. “Demand will remain low for longer than expected”, she believes. It will still be significantly more than the 91 million in 2020.

Back to school

Many experts predict anyway a rise in prices in 2021. MUFG expects Brent to average 58 dollars in 2021, against 38 dollars in 2020, and 64 dollars at the end of next year. RBC Capital Markets predicts an average price per barrel of $ 51.50 next year, not far from its current level ($ 51 on December 24).

The price of a barrel is all the more difficult to predict as it will also depend on the evolution of production. And the latter, as always, is far from determined. Of course, the OPEC countries and their ten allies led by Russia continue to voluntarily limit their exports in order to support prices. Their agreement, in theory, will remain in force throughout 2021, with a gradual relaxation of quotas. But will this agreement hold?

Tensions within OPEC

The year 2020 brought to light the growing tensions within the cartel and its Russian ally. The price war between Moscow and Riyadh in March has left its mark, and new fault lines appeared at the end of November during the last OPEC summit. The UAE, traditionally allied with Saudi Arabia, questioned quotas, saying they wanted to increase production.

For Citi, these dissensions are explained by a growing concern about the energy transition, which weighs on the demand for oil in the medium term. More and more oil states want to maximize their production now, lest their assets end up ‘stranded’ [les « stranded assets » sont les actifs qui pourraient subir des dépréciations du fait de la transition écologique, NDLR] earlier than expected. By announcing a halving of their production by 2030, the Emirates would mechanically reduce the lifespan of their immense reserves from 90 years to 50 years.

Shale slowed down but not killed

Markets are also looking across the Atlantic to US shale oil producers. The year 2020 saw the production of the United States decline, for the first time since the previous oil crisis, in 2016. Faced with the drop in prices, many shale oil operators stopped investing to drill new well. This financial discipline is new: for years, shareholders of American companies have accepted that operators are in the red, betting on future growth.

This new trend limits the resumption of production in the United States, but for how long? Citi analysts believe that US production will recover as soon as world prices start to rise again. Beyond 55 dollars the price of Brent, the battle for market shares between OPEC and American shale would resume. “Shale is a monster that we can slow down, but not kill”, writes Bjornar Tonhaugen of Rystad Energy.

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