A year of uncertainty • Focus: Oil prices

The COVID-19 pandemic made 2020 a volatile year for oil production and prices, though predictions for 2021 are more stable.

THE START OF THE GLOBAL COVID-19 PANDEMIC in early 2020 has caused serious economic disruptions in sectors and in countries around the world. This disruption has been especially acute for the petroleum industry, as worldwide demand for oil dropped at nearly unprecedented rates. With restrictions on travel at both the national and international level, the implementation of local curfews and the widespread closure of businesses and some factories, energy— and thus oil—demand fell unexpectedly. Despite early hope for a quick end to the pandemic, the rollout of various vaccines have taken longer than initially expected, raising concerns that economic recovery and demand for oil may not return pre-pandemic levels until 2022 or 2023 at the earliest.

A report from S&P Global Platts released in early 2021 projected global demand for oil to increase by more than 6 million bpd through 2021. Taking into account the rapid increase in infection rate at the start of the year, the firm projected demand will return to 2019 levels sometime in 2022. Demand for oil is expected to average just over 99 million bpd in 2021, an increase from the 2020 level of 93.1 million bpd. Alternatively, the International Energy Agency estimate in late January 2021 that the year’s demand would reach 69.6 million bpd, while OPEC’s figure stood at 95.9 million bpd. For 1Q2021, the firm projects demand to be 95.1 million bpd, a revision to its original projection that is 700,000 bpd fewer, due to many countries going back into lockdown and lunar new year celebrations in China being scaled back.

S&P’s projections for the second quarter are more promising, with a YoY increase expected at 11.7 million bpd, a figure that will depend on the successful and large-scale rollout of vaccines. By the start of 2022, demand is anticipated to grow an additional 2.8 million bpd, at which point it will return to 2019 levels of around 102 million bpd.

While demand for oil is poised to continue its steady return to pre-pandemic levels, predictions for the price are expected to fluctuate throughout the year. S&P Global Platts predicts that the price per barrel of Brent crude will average at USD53.30 in 2021, an increase of USD6.65 from its initial projection. The price is expected to fluctuate throughout the year; the summer months are likely to see the price per barrel rise to USD59 when summer demand peaks in July and August, before dropping down to USD55 per barrel by the end of the year. Other projections for the price of Brent in 2021 are similar; Barclays expects the average price per barrel to average at USD55 for the year, Goldman Sachs predicts an increase to USD65, and UBS anticipates it to reach USD60.

Stability in price and sound estimations on demand will surely be welcome for major oil producers in 2021, following a rather tumultuous year of production. A short lived, though consequential, spat between OPEC and Russia toward the start of the pandemic saw prices for oil fall by as much as 34%. In March 2020, Russia refused to reduce its oil production in order to maintain prices at a moderate level, effectively walking out on the deal it had among OPEC+ members. Saudi Arabia responded by dropping the price by 65%, bringing prices down to almost USD20 per barrel. This was after prices for oil had already fallen by 30% due to the significant reduction in demand wrought on by the pandemic.

In early March 2020, the Kingdom unexpectedly discounted oil at USD6 to USD8 per barrel to customers in Asia, Europe, and the

US, which instigated a near free fall in the price of oil and ultimately resulted in the largest drop in the price of Brent crude since the Gulf War.

The effects were widespread. Stock markets around the globe saw considerable losses, and the Russian ruble fell 7% in value. On March 10, the Kingdom announced it would increase its production by 2.5 million bpd to 12.3 million. The government also instructed Aramco to increase its short-term production capacity by 1 million to 13 million bpd. For the next month, a dramatic round of price increases and decreases followed a series of announcements and cuts from various oil producing nations. Despite Russia’s initial reluctance to reduce production, on April 3 the federation and Kingdom together agreed on production cuts. OPEC and Russia agreed to a combined 10 million bpd reduction in output. At the time, OPEC predicted demand to fall by about 6.8 million bpd, potentially going as high as 35 million bpd due to the pandemic.