From negative crude oil prices to renewed fears of new Covid-19 virus strains: Here’s how the oil outlook will be in 2021 and beyond
Crude oil prices had a dramatic year in 2020, as travel demand collapsed in the wake of the Covid-19 pandemic. Oil prices even went into negative territory in April 2020, as oil companies sought to rent tankers to store its surplus supply, over fears that they could run out of storage capacity.
Oil companies continue to feel the spill over effects from last year’s crude oil price fluctuations. Saudi Aramco, the world’s largest oil company, saw its profits fall by 44% to US$49 billion for the full year, and cut its forecast capital expenditure for 2021 to just US$35 billion.
2021 appears to be little changed from 2020, with volatility remaining high for the crude oil market.
Fears of newer and more infectious strains of the coronavirus continues to plague large economies, including Europe, Brazil and India. India reported the appearance of a “double mutant” variant of the coronavirus and, both Brent crude prices and West Texas Intermediate (WTI) crude futures prices slid 2% from the news.
That decline would prove to be short lived. Within 24 hours, Evergreen’s Ever Given container ship would run aground in the Suez Canal, block an essential shipping route, raise concerns of a potential supply shortage, and lift oil prices again.
Understanding what really matters for crude oil prices
Instead of being swayed by every piece of news – including what happens when the giant container ship is refloated after nearly a week – it is important that investors understand what really matters with crude oil prices.
Avtar Sandu, senior manager for commodities at Phillip Futures, points out that factors affecting the supply and demand for crude oil is far more significant that the actual movement of oil prices.
“The structural drivers that were driving crude oil prices higher over the last 2 quarters are still very much a part of the bigger picture.”
“OPEC+ has been consistent in its intention to balance the crude oil market; Covid-19 vaccines have been rolled out and distributed to many parts of the globe which means the coronavirus pandemic is gradually being eradicated on a massive scale; Travel and fuel demand is picking up slowly and airlines are working on plans and processes for mass travel.”
Returning to the example of Saudi Aramco, Sandu explains that the oil giant’s earnings were entirely within expectation. “Oil companies’ earnings are dependent on oil prices, and Saudi Aramco is no exception. In a year where demand fell and oil prices were negative for a short period of time, their earnings were not unexpected.”
“We should note that Saudi Aramco is still maintaining its US$75 billion dividend payout for the year – the largest pay out among oil giants and the main source of income for the Saudi Arabian government – and the company remains upbeat about its outlook. If Saudi Aramco had not paid dividends, that is when we need to be concerned.”
As such, Sandu remains optimistic about crude oil prices for the rest of the year. “Although the crude oil has appreciated about US$30 a barrel in the last 5 months, there is still room for further upside, given that the fundamentals are still favouring it. WTI oil prices are expected to average US$80 a barrel this year.”
Other major events investors should look at
There are other major events that crude oil and commodity investors should pay close attention to this year, according to Sandu.
“China has clearly emerged from the ravages of Covid-19 faster than other giants like the US and the EU – many of whom are still struggling to contain the virus among its people. With that, China is expected to led the world in restarting its economy and that fallout would help other countries who are tied to its exports and consumption needs.”
“The old adage that ‘when China sneezes, the world catches a flu’ would still hold true in the economic sense.”
In fact, Sandu points out that many investment banks, like Goldman Sachs, are already calling for a start of a multi-year commodity supercycle. “Many commodity prices have rebounded strongly in the last quarter of 2020 and the first quarter of 2021 due to the expectation that the world would experience a V-shape recovery from the vaccine roll-out.”
“Covid-19 is expected to bring long term structural changes, from the global economy down to the way we live and interact. These changes could drive commodity prices to a structural bull market. For instance, Copper – the bellwether of the industrial metals sector – has risen to record highs not seen in the past 10 years. Furthermore, the green revolution is driving demand for new clean energy products in a big way, and that would propel commodity prices further.”
Investing wisely in crude oil
Sandu cautions that there is no ‘one size fits all’ trading strategy that can suit all investors and all market conditions. “The key lies in knowing and being clear about your own objective in trading, and what sort of gains you are looking for. Some markets, like crude oil futures, are more volatile than others, like fixed income markets. This also illustrates the importance of prudent risk management.”
“If you are not familiar with the inner workings of the oil markets, it is best to talk to professionals in the field who can advise you further.”
Phillip Futures, a leading regional brokerage, offers a wide range of financial derivatives which investors can partake to trade oil. That includes oil futures, options, CFDs, and spread trading in oil. Among them, the CME WTI Futures contract remains the most popular among traders.
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