Strategist’s Tools
December 1, 2020
Oil production in the world in 2019 reached 82.32 million barrels per day
Overview of changes in oil prices in 2019-2020
More and more players in the market want to increase their piece of the pie by increasing production, thereby reducing the price of oil
Permanent agreements on production cuts are not a panacea and lose their relevance over time, as the number of countries that do not adhere to them is growing
January 2020: Quarantine regime was first introduced in Wuhan city, and with China being the largest oil consumer since 2003, oil demand has dropped sharply
March 2020: WHO acknowledges that COVID-19 has become a pandemic. At the same time, countries massively began to apply strict quarantine regimes, which led to a halt in all production. At the same time, the volume of oil production remained at a high level
March 6, 2020: at OPEC + meeting, Saudi Arabia and Russia failed to reach agreement on adjusting production volumes
April 12, 2020: Both sides reached an agreement to cut production by 9.7 million bbl / day in May and June
April 2020: Despite agreements, oil production far exceeded demand. India said that the tanks were 95% full, and the Korean company KNOK - no longer had storage capacity
The price hit a low on April 20, 2020, when WTI crude futures were at -$36.98 / bbl, setting an anti-record. For the first time in history, WTI prices turned negative
After loosening the quarantine measures and agreement on production cuts, oil price relatively increased
The pandemic is not over yet, and the scale of its impact on the global economy is still very difficult to predict and assess. We do not expect a quick recovery in oil demand
Oil demand
The global oil market has become a buyer's market, not a seller's
Low economic growth and oil surplus due to high production levels led to a collapse in demand.
The state of China's economy
China significantly affects the global economy: production, demand, trade, as well as the oil price.
China's GDP in the first half of 2020 decreased by 1.6% (compared to the same period in 2019).
June 2020: IMF lowered the growth forecast for China's economy in 2020 to 1% from 1.2%, and in 2021 the growth is expected at the level of 8.2% (previous forecast was 9.2%).
Chinese companies form an alliance to purchase oil abroad.
Global economic crisis
The Covid-19 pandemic had an extremely negative impact on oil prices since the first quarter of 2020.
The pandemic is not the primary reason for the fall in prices, it is one of the factors,
because the price began to fall long before the start of the epidemic.
The business activity index in the world began to decline, and signals of another crisis appeared in the global economy in 2019.
Geopolitical factors
Any political, economic situations, wars, natural disasters and change of political regime - all this, though not directly, but indirectly affect the oil price.
Due to the fact thatmany fields are located in the Middle East, any events in this region will have a strong enough effect on the world oil price.
Oil production cuts
In April 2020, the OPEC + countries agreed on the terms of the largest agreement in their history on a record oil production cut of 9.7 mln bbl / day (first stage from
May 2020).
There is a possibility that the agreement will not be respected by all OPEC + countries. Not all major players are willing to join an organization or stick to oil cut commitments.
Change in the level of oil reserves of key players
Assessment of commercially recoverable reserves isa value that constantly changes depending on the state of the oil market.
Analysts and market players take into account periodically updated data on the level of oil reserves of key players. And in aggregate with other factors, they react or do not react to market changes.
US elections 2020
The official results of the US elections*, as well as the future policy of the new President, are one of the significant political factors that can affect not only oil prices, but also stock and foreign exchange markets.
As the Democratic presidential candidate J. Biden has presented the $2 trillion Clean Energy Plan, which aims to remove natural gas from the US energy balance within 15 years. Also, shale companies have concerns about a possible ban on hydraulic fracturing in case of implementation of J. Biden’s election program.
The current at that time US President D. Trump has claimed that such plans of
J. Biden are not realistic and will only lead to higher energy costs and cut of a large number of jobs in the oil and gas sector.
* Elections were held on November 3, 2020 Official results have not yet been announced US President-elect is Joe Biden
A number of oil-exporting countries may face potential budget deficits in the next two years
Forecasted break-even point in oilexporting countries in 2020-2021
Oil exporting countries are heavily dependent on energy revenues to finance their economy as a whole, including the allocation of subsidies to address priority issues in these countries.
Potential fiscal deficits in many oil exporting countries can be expected in the near future.
Many oil exporting countries, due to a decrease in oil price, will not be able to fully compensate for the fall in income, which will lead to an increase in their sovereign debt and may put pressure on the exchange rate of national currencies.
Many analysts predict the Brent oil price in the corridor of $35-50 per barrel in 2020-2021(based on the estimates announced in June-September 2020)
International Monetary Fund (IMF) forecast, July 2020, $ per barrel
The indicator for calculations in the IMF study is taken as the arithmetic mean of the cost of the following grades:
-British grade of oil
-Dubai
-West Texas
According to our forecasts, we do not expect a quick recovery of the economy and oil demand in the next two years: in 2021 the oil price is projected in the range of $32-42 per barrel
Average annual prices for Brent oil, $ per barrel
As of September 14, 2020, the average annual oil price for 2020 was $40.9 per barrel.
Overall, we expect the average annual oil price to remain roughly the same until the end of 2020.
If the economic situation worsens due to the next waves of coronavirus, the oil price may fall to $36 per barrel (conservative estimate).
Due to the greater uncertainty in 2021-2022, the estimate varies in the range of $32-42 and $38-48 per barrel, respectively.
As discussed in the previous sections, the global oil market has become a buyer's market, therefore, the recovery in oil demand is the main factor that will affect the price of oil in the coming years.
Also, due to the fact that many oil-exporting countries may face budget deficits, the provision of oil discounts can be widely applied.