Uncertain Times for Oil Prices

The onset of the COVID-19 pandemic in early 2020 unleashed unprecedented economic disruptions across sectors and countries worldwide. The petroleum industry, in particular, faced a severe blow as global demand for oil plummeted at an alarming rate. Travel restrictions, local curfews, business closures, and factory shutdowns led to an unexpected drop in energy consumption, consequently impacting oil demand. Although initial hopes for a swift resolution to the pandemic were high, the delayed rollout of vaccines has raised concerns that economic recovery and a return to pre-pandemic oil demand levels may not occur until 2022 or 2023.

According to a report by S&P Global Platts in early 2021, global oil demand was expected to increase by over 6 million barrels per day (bpd) throughout 2021. Accounting for the rapid increase in infection rates at the beginning of the year, the firm projected a return to 2019 demand levels by 2022. The estimated average oil demand for 2021 was forecasted to be just over 99 million bpd, representing an increase from the 2020 level of 93.1 million bpd. However, alternative estimates from the International Energy Agency and OPEC varied, with the former predicting 69.6 million bpd and the latter standing at 95.9 million bpd. S&P Global Platts revised its 1Q2021 demand projection to 95.1 million bpd, 700,000 bpd lower than initially expected due to renewed lockdowns in several countries and scaled-back lunar new year celebrations in China.

S&P Global Platts’ projections for the second quarter appear more optimistic, with a year-on-year increase of 11.7 million bpd anticipated, contingent upon the successful and large-scale rollout of vaccines. By the beginning of 2022, demand is expected to grow by an additional 2.8 million bpd, reaching around 102 million bpd, equivalent to pre-pandemic levels in 2019.

While demand for oil gradually returns to pre-pandemic levels, price projections for the commodity are anticipated to fluctuate throughout the year. S&P Global Platts forecasts an average Brent crude price of USD53.30 per barrel in 2021, reflecting an increase of USD6.65 from its initial projection. The price is expected to vary throughout the year, with the summer months likely witnessing a peak price of USD59 per barrel due to increased summer demand in July and August, followed by a decline to USD55 per barrel by year-end. Similar projections from Barclays, Goldman Sachs, and UBS estimate Brent crude prices to average at USD55, USD65, and USD60 per barrel respectively in 2021.

Stability in prices and reliable demand estimations will bring relief to major oil producers in 2021, following a tumultuous year of production. A brief yet significant conflict between OPEC and Russia at the pandemic’s onset caused oil prices to plummet by as much as 34%. In March 2020, Russia’s refusal to reduce oil production as part of an OPEC+ deal led Saudi Arabia to slash prices by 65%, bringing them down to nearly USD20 per barrel. This price drop compounded the already 30% decline in oil demand resulting from the pandemic.

The repercussions were widespread, with global stock markets experiencing substantial losses and the Russian ruble depreciating by 7%. On March 10, Saudi Arabia announced a production increase of 2.5 million bpd to 12.3 million, while instructing Aramco to raise its short-term production capacity by 1 million bpd to 13 million. Over the following month, a series of announcements and production cuts from various oil-producing nations led to a dramatic cycle of price fluctuations. Eventually, Russia joined forces with OPEC, agreeing to a combined reduction of 10 million bpd in output. During that time, OPEC predicted a potential demand drop of about 6.8 million bpd, potentially reaching as high as 35 million bpd due to the pandemic’s impact.

The global oil industry has grappled with significant challenges amid the COVID-19 pandemic, with demand plummeting and prices experiencing volatility. Projections indicate a gradual recovery in oil demand, but the timeline for a return to pre-pandemic levels remains uncertain. The successful rollout of vaccines will play a crucial role in determining the pace of recovery. Oil prices are also expected to fluctuate throughout the year, with various forecasts projecting different average price levels. Major oil-producing nations are eagerly anticipating stability in both demand and prices after a tumultuous period of production disruptions. As the industry navigates these challenges, close monitoring of demand, production decisions, and market dynamics will be essential for stakeholders to adapt and plan for the future.


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