Oil price outlook steady
Modest gains expected in 2021, supported by Covid vaccine rollouts and a recovering world economy.
Dubai crude oil prices, the benchmark used in Southeast Asia, are forecast to average between US$45 and $55 per barrel this year -- they ended 2020 around $51 -- as the market expects that the Covid-19 pandemic will ease and economic activity is likely to pick up.
After plummeting by an estimated 8.8 million barrels per day (bpd) or nearly 9% in 2020, world oil demand is expected to grow this year by 5.7 million bpd to 96.9 million, the International Energy Agency (IEA) forecast in December. This would be in line with world economic growth of 5.2%, recovering from a contraction that the International Monetary Fund estimated at 4.4% -- an even bigger plunge than the average of 4.3% during the Great Depression from 1930-32.
Dubai crude prices in 2020 averaged $42 per barrel, down from $64 the previous year, reflecting the Covid-induced curtailment of economic activity including consumption, investment, production and exports, causing economic recessions in several developed and developing countries.
But the global economic outlook has now turned more positive, especially in light of the massive monetary and fiscal stimulus measures that have been put in place to relieve the impact of the pandemic in the past year. And while severe measures including lockdowns are still in place in many countries to contain the latest wave of the virus, the gradual rollout of vaccines has brought hope that the worst could be over in a few months.
Vaccination programmes are now under way in 50 countries including the United Kingdom, the United States, Russia and across the European Union. Initial progress has been slow in many locations but authorities hope to sort out distribution problems soon. This has boosted the market's confidence that oil demand could recover with a return to normal economic and travel activities if the vaccines approved so far are effective and sufficient for the world's population.
However, crude prices in 2021 will still be under pressure from higher supplies, which are likely to increase as Opec and its allies are planning to taper down their output cuts to match demand, which is expected to rise gradually throughout the year.
At the Opec+ meeting in early December, participants led by Saudi Arabia and Russia agreed that aggregate output cuts of 7.7 million bpd between August and December 2020 would be tapered to 7.2 million this month. The group will meet monthly to review demand and adjust output as needed, with an eye to supporting prices around current levels. Supplies from non-Opec producers such as Norway and Brazil are also forecast to increase by 530,000 bpd this year.
A sharp rise in crude production by Libya is also putting pressure on the oil market. The country is currently exempt from the Opec-led output-cut agreement because it is still recovering from a protracted civil conflict.
But a ceasefire and peace accord between the fragile government and rebel groups is holding, allowing the National Oil Corporation to ramp up production and exports. Libyan output in the fourth quarter of 2020 reached 1.2 million bpd, close to pre-conflict levels and 10 times the amount the country was pumping between February and September last year. Libya will not be required to comply with the Opec+ agreement until its output reaches 1.7 million bpd.
Another concern for the market is high crude inventories in both floating and onshore storage, the consequence of the plunge in demand as the pandemic started to spread worldwide in March and April last year. At one post last year, onshore crude storage volumes worldwide as of November were 300 million barrels higher than in the same month a year earlier.
However, prices are being supported for now by the output reductions made by Opec and its allies. They responded quickly to the demand destruction early in the course of the pandemic, taking 9.7 million bpd off the market between May and July 2020. That helped to reverse a price plunge that at one point sent futures contracts for West Texas Intermediate crude into negative territory.
Opec+ subsequently scaled back its output cuts to 7.7 million bpd in August last year and now to 7.2 million bpd, believing current price levels are viable for most producers.