Oil Market Outlook Improves On COVID-19 Vaccines: Oil Prices Could Average $53 b/d In 2021
Oil prices have moved higher through the $50 a barrel barrier after a tumultuous 2020 that saw prices tank to record lows. The implosion came as the global economy capitulated amid a pandemic that brought economic activities to a standstill. Lockdown restrictions that resulted in movement restrictions resulted in a decline in oil demand and consumption to levels not seen before.
Oil Prices Implosion
In the first quarter of last year, oil consumption declines were much higher compared to declines in oil production, triggering record global oil inventories of 1.2 billion barrels. As the world came to terms with how to deal with the pandemic, the damage had already been done.
A good number of companies had filed for bankruptcy on oil prices tanking to record lows. The oil mining business became untenable, given the low oil prices and an oversupplied market.
Normalcy has slowly crept in, as depicted by oil price chart above, even as the world struggles with the second wave of infection. Unlike in the first quarter, Brent crude oil prices appear to have found support above the $40 a barrel level on global oil demand increasing.
Rising oil consumption and reduced oil production are factors that have helped offer support to oil prices above $50 a barrel. Production cuts by members of the Organization of the Petroleum Exporting Countries (OPEC) and its partners have also played a pivotal role in stabilizing oil prices at current levels.
The unveiling of coronavirus vaccines should help steer oil prices higher in revitalizing economic activities worldwide. People’s mass vaccination should go a long way in averting COVID-19 fears highly needed to encourage people to move around and into workplaces.
The vaccination of a good number of people should result in the opening up of economies after months of lockdowns. The opening up of economies worldwide should result in economic activities bouncing back highly needed to ramp up oil demand. The air travel industry, which has been the hardest hit, is more than likely to bounce back on it becoming clear that the vaccines are keeping people safe from the virus.
Global Oil Consumption Outlook
Likewise, the U.S. Energy Information Administration expects global oil consumption to edge higher in 2021 at the back of mass vaccination. Oil production is also expected to edge higher as producers meet the high demand and take advantage of the $50 a barrel price tag. Global oil inventories should continue to decline as oil demand increases with the opening of the global economy.
Due to the COVID-19 pandemic, global liquid fuels consumption dropped by 9 million barrels a day in 2020, the largest annual decline since 1980. The IEA projects oil demand to reach 5.7 million a day in 2021.
The expected rise in consumption could be attributed to rising gross domestic product and pre-pandemic patterns. While the global gross domestic product declined by 3.9% in 2020, it is projected to increase by 5.4% in 2021 and by 4.3% in 2022.
In addition, oil consumption increases will depend a great deal on business activities improving. Likewise, consumption will also depend on whether people are allowed to move freely, as was the case before the pandemic.
Standing in the way of oil consumption bouncing back would be a rise in COVID-19 infections triggering a new round of lockdowns. Changes to consumer behavior could also continue to affect global oil demand this year.
Oil demand will also vary depending on the petroleum product. Jet fuel demand, which has remained at subdued levels given the reduced air travel activity, is expected to remain below pre-pandemic levels in 2021.
A spike in jet fuel demand will depend on whether the COVID-19 vaccines will do much in assuring travelers of their safety in air travel. Likewise, Jet fuel demand is expected to return to the pre-pandemic level, more quickly in China and the U.S than in other parts.
Global Oil Production Outlook
In April of last year, oil production cuts helped reverse inventory buildup that had plunged Brent crude oil prices to record lows. A decline in oil production to lows of 23.6 million barrels a day in the third quarter also helped avert a buildup of inventories. However, a return to oil production in Libya and relaxation of production cuts by OPEC resulted in production rising to 24.9 million barrels in the fourth quarter.
While Russia and Kazakhstan have confirmed modest production increases of 75,000 barrels per month between February and March, Saudi Arabia says it will cut production by an additional 1 million b/d in February and March.
Crude oil production is expected to average 27.2 million b/d in 2021, up 1.6 million b/d from 2020 levels, which should increase by a further 1.1 million b/d in 2022 to 28.2 b/d million. Venezuela, Libya, and Iran, which are not subject to OPEC agreements, could be the trigger behind a spike in crude production in 2021 and 2022.
Oil Prices Outlook
While WTI oil prices traded in a wide range fluctuating between $62 a barrel at the start of the 2020 and $18 a barrel, that is not expected to be the case in 2021. The wide range was down to a sharp decline in oil demand and consumption, a situation compounded by a sheer rise in global inventories.
Oil prices increasing through much of the rest of 2020 paints a clear picture of what should be expected to open economies around the world amid the mass vaccination drive. WTI prices powered through the $50 a barrel early in the year on future economic recovery expectations. Brent prices also reached their highest level in almost ten months on Saudi Arabia announcing a one-month 1 million a barrel a day cut from February.
Oil prices are projected to find support above the $50 a barrel mark and average $53 b/d in 2021 and 2022. Saudi Arabia cutting production by 1 million b/d should help push inventories lower, which in return could trigger higher prices of as much as $56 a barrel in the first quarter
However, high global oil inventories and surplus crude oil production could limit upward oil price pressures.