2020 is a special year in history. In the coming year, the world has experienced the unprecedented impact of the new epidemic, and the global economy has been hit hard. As well as the economic aid plans of Europe, America, Asia and other economies, this year is also a year of difficult economic recovery. The performance of international crude oil has experienced ups and downs. We have also witnessed many historical moments, such as the breakdown of OPEC + talks, ultra scale production reduction, “negative oil prices” and the farce ridden US election. According to the price comparison chart of business club in 2018, 2019 and 2020, the crude oil market in 2020 is the most difficult year.
Let’s first review the crude oil market trend in 2020
On the whole, according to the data of business news agency, as of December 24, 2020, WTI crude oil fell to $48.23/barrel from $61.68/barrel at the beginning of the year, down 21.81%, and Brent crude oil fell to $51.34/barrel from $68.44/barrel at the beginning of the year, down 24.99%.
Since the outbreak of the epidemic at the beginning of the year, the oil price has rapidly entered the downward channel. At first, the market was worried about the decline of China’s fuel demand and the suppression of the economy. From January 20 to January 31, Brent crude oil fell from US $65.20/barrel to US $56.62/barrel, down by US $8.58/barrel (13.2%). WTI crude oil fell from US $58.38/barrel to US $51.56/barrel, a decrease of US $6.82/barrel (11.7%). With the control of China’s epidemic situation and the reduction of OPEC + production, oil prices experienced a brief rebound. In March, the OPEC + production reduction agreement broke down, Russia and Saudi Arabia fought a price war, Saudi Arabia announced a large-scale production increase to gain more market share, and the two sides wrestled with each other to return to the negotiation table. Oil prices plummeted, and WTI fell from $47 at the beginning of March to $20 at the end of the month, a drop of more than 36%.
However, with the rapid spread of the epidemic around the world and the sharp drop in fuel demand, oil prices are still in the downward channel. Subsequently, OPEC + reached an agreement on large-scale production reduction, and OPEC + is ready to jointly reduce production by 9.7 million B / D in May and June. At first, however, the market did not give positive feedback. On the contrary, the sudden drop of demand, the increase of shale oil production in the United States, and the bottleneck of oil storage capacity in the United States, especially the Cushing area near full load, triggered one of the most notable events this year – “negative oil price” event, in which the monthly delivery contract of WTI fell to – 37 US dollars.
After May, OPEC + entered into the period of super scale production reduction, the epidemic situation improved, the demand recovered, and the international oil price began to rise. During the period of super scale production reduction of OPEC + from May to June, WTI rebounded nearly 100%, from $19 at the beginning of May to $38 at the end of June.
In the second half of the year, although the epidemic situation was still fermenting, the economy continued to recover, and the oil price entered a relatively stable stage. In July, OPEC + extended a month’s super scale production reduction (9.7 million barrels), and the production reduction scale dropped to 7.7 million barrels / day from August. From July to October, oil prices have been rising and falling, mainly in the range of shocks. Even the hurricane in the Gulf of Mexico in August and September, and the endless farce in the US election, did not bring about another dramatic shock to oil prices, such as the breakdown of OPEC + negotiations and negative WTI oil prices.
After November, the new crown vaccine made a major breakthrough, oil prices opened up the upward channel, and OPEC + reached a production reduction agreement in early December, which also released a positive signal to the oil market, that is, OPEC + will “increase production” by 500000 barrels / day in January 2021. Due to the small increase in production, it will also give a reassurance to the uncertain crude oil market in the future. On December 10, Brent crude oil once broke the $50 mark, reaching a nearly eight month high. As of December 28, oil prices were still around $50.
Prospects for 2021
Vaccine and epidemic game demand continues to recover
The epidemic situation in 2020 has always existed. At present, the world economy in 2021 may still be shrouded in the shadow of the epidemic situation. Although the vaccine has made a major breakthrough and entered the vaccination process, there are still many variables in the current epidemic situation. For example, the number of infected people is still increasing, Europe and the United States are still implementing restrictive measures, and the virus variants also bring new challenges to the vaccine. The most important factor of oil price around 2021 is still demand. Recently, OPEC has lowered its oil demand forecast for 2021 again. Due to the continuous impact of the new epidemic, the rebound speed of global oil demand in 2021 will be slower than previously expected. Its latest monthly report shows that the demand will increase by 5.9 million barrels / day to 95.89 million barrels / day next year. This growth is expected to be 350000 B / D lower than a month ago. The recovery of demand has a long way to go.
The diminishing marginal benefit of China’s demand
As for the growth of China’s crude oil demand, it may slow down. Since 2020, China’s crude oil demand has also been severely hit by the epidemic, and the prevention and control is appropriate. After April, crude oil consumption has basically recovered to the level before the epidemic. As the oil price remains low, China’s crude oil imports will only increase. Some institutions predict that China’s crude oil imports in 2020 are expected to exceed 550 million tons (11.01 million barrels / day) or even more, an increase of 8.3% over the record 10.16 million barrels / day crude oil imports in 2019. However, the growth of crude oil imports has also led to a substantial increase in domestic crude oil inventory, accompanied by a decline in refinery efficiency and a continuous decline in operating rate. Under the influence of the epidemic, domestic oil product consumption in 2020 will not perform well. The data show that the cumulative apparent consumption of oil products (gasoline, diesel and coal) in the first 10 months of 2020 will be 240 million tons, a year-on-year decrease of 7.2%. It is expected that in 2021, China’s crude oil inventory may continue to grow and demand will continue to recover, but the growth rate may slow down.
There are also some risks and variables in the supply of oil in 2021. The risks lie in the geopolitical risks of oil producing countries in the Middle East, the increase of shale oil production in the United States and Libya, and the risks of the U.S. policy towards Iran. The variable lies in the implementation of OPEC +, a loose organization of production reduction agreement, and the continuation of the later production reduction policy.
Stable implementation of OPEC + production reduction agreement
Generally speaking, OPEC + may still implement the policy of gradually reducing the scale of production, and OPEC + should adjust its policy in time according to the recovery of global fuel demand. From January 2021, OPEC + will reduce the production reduction scale from 7.7 million B / D to 7.2 million B / D, increasing by 500000 B / D. in addition, it will hold a ministerial meeting once a month to adjust the production reduction scale in a timely manner, and the monthly adjustment will not exceed 500000 B / D. From the current policy point of view, it should be relatively moderate, and its impact on the market tends to be positive. But we can not rule out the negative effect of some members’ negative production reduction.
Us shale oil may continue to grow and increase supply risk
In terms of shale oil in the United States, due to the rising oil price in the second half of 2020, the increased willingness to invest in shale oil, and the continuous rise of shale oil active drilling rigs, Baker Hughes data show that as of December 18, the number of active drilling rigs in the United States has increased to 264, which has been rising for five consecutive weeks, and the well completion scale has also improved. At present, the market is generally optimistic about the continued economic growth in 2021 Recovery, better fuel demand and oil price may continue to pick up, which may stimulate more enterprises’ willingness to complete inventory wells and increase active drilling rigs. As a result, US crude oil production may increase, which will have a certain impact on the market. However, judging from the ruling policy of Biden’s Democratic Party, it may pay more attention to the development of clean energy in environmental protection and restrict polluting energy. Due to the severe impact of the epidemic on shale oil enterprises before, trump did not strictly abide by the emission standards during his administration. If a new emission standard is formulated next year, it will raise the cost of shale oil enterprises and suppress some demand. But judging from the current economic situation in the United States, the new standards will not be implemented in the first half of the year at least. But in the long run, shale oil investment may be limited by democratic policies.
Geopolitical risks exist for a long time
In addition, there are still geopolitical risks in the Middle East. Attacks on oil fields in the Middle East have occurred from time to time in the past two years. Especially now, the cost of UAV equipment bomb attacks is low and the maneuverability is convenient, which also brings greater risks. But it can only be a short-term impact. As for the U.S. nuclear policy toward Iran, it is not very clear at present. Whether the Iranian nuclear crisis can be lifted is not a day’s work, and it may still have a long way to go. In the short and medium term, the U.S. sanctions against Iran will not be lifted, and the supply risk of Iran is basically controllable in the short and medium term. But in the long run, Iran, including Venezuela, is still the biggest risk point of supply. If the US policy changes, the pressure on market supply will increase significantly.
Overall, the economy will continue to recover in 2021, the global monetary easing environment will not be broken, and the use of vaccines will further dilute the negative impact of the epidemic. In addition, OPEC + production reduction policy should still play a positive role. Shale oil in the United States is expected to grow again. Saudi Arabia, Russia and the United States are still in the triangle of supply side game. As the global oil market continues the process of destocking in the process of demand recovery, it is likely that oil prices will continue to rise, but the uncertainty of demand and the risk of supply may limit the extent of the rise.