The outbreak of COVID-19 has severely contracted the world economy, and the demand for oil was affected accordingly.
The International Monetary Fund (IMF) has cut its forecast for global economic growth (GDP) in 2020, to a contraction of 4.4%. Meanwhile, global oil demand will not return to the 2019 level, estimated at 100 million barrels per day by the International Energy Agency (IEA). In 2020 global oil demand has dropped by 9 million barrels per day to around 91 million barrels per day.
Mr. Disathat Panyarachun, Senior Executive Vice President, International Trading Business Unit, PTT Public Company Limited, said that on the supply side, OPEC and its allies (OPEC+) tried to support oil prices and reached an agreement to cut crude oil production by 9.7 million barrels per day from May to July 2020. However, OPEC+ has cut production by 7.7 million barrels per day from August to December 2020, and according to the latest general meeting on 3 December 2020, OPEC+ resolved to reduce crude oil production in January 2021 by 7.2 million barrels per day. (Originally, OPEC+ planned to reduce crude oil production by 5.8 million barrels per day during January 2021 and April 2022.)
Mr. Disathat added: “From now on, monthly meetings to discuss the suitability of the uncertain oil market will mean risking supply increase in case OPEC+ is unable to balance the production plan adjustments.”
PTT analysts forecast global GDP growth of 5.2% in 2021 (in line with IMF estimates), resulting in global oil consumption of 5.3 million barrels per day, in line with the United States’ Energy Information Administration (EIA) estimate of 5.8 million barrels per day. Meanwhile, the supply of the Non-OPEC group is forecasted to grow to 1.2 million barrels per day. OPEC will continue to act to maintain balance by adjusting oil production according to market conditions with the objective to reduce global crude stocks in 2021 by 800,000 barrels per day.
Regarding oil production of major oil producers and exporters, OPEC+ maintains a policy to closely monitor oil prices to prevent another fall in price if COVID-19 spreads again. At the same time, the price recovery shall be at an appropriate level not to affect the fragile global economy. Another concern is the return of the United States shale oil production, which is OPEC’s main competitor. Production by the United States dropped from a record high of 13.1 million barrels per day in early 2020 to 11.1 million barrels per day now (the lowest point was at 9.7 million barrels per day in August 2020).
This is due to the fact that the United States shale oil production was not economically profitable and many producers had to stop their operations in 2020. Many of them went bankrupt as the average production cost of shale oil is currently between US$35-45 per barrel.
Nevertheless, the oil price assumption might be adjusted depending on the ability to control COVID-19 pandemic, for instance, the vaccine’s effectiveness and accessibility to the world population. Other factors include the stimulus-induced economic recovery, economic and trade policies, and international relations between world powers such as the trade war between China and the United States.
Another notable issue is the geopolitical situation between the United States and Iran as President Donald Trump withdrew the United States from the nuclear deal with Iran in May 2018, even though Russia, Britain, France, and Germany tried to uphold the pact.
After Mr. Joe Biden assumes the presidency, the Biden’s administration might return to the original nuclear deal and relax sanctions, including allowing Iran and even Venezuela to return to exporting crude oil, which will increase the oil supply.
Moreover, President-Elect Biden's long-term energy policy is likely to bring the United States back to the COP21 agreement to help reduce global warming. The United States will focus on clean energy, and limit production of crude oil and natural gas. This may cause growth in production of crude oil in the United States to slow. As for the policy promoting clean energy, including electric cars, analysts expect a significant long-term impact on oil use lasting at least 10 years.
Mr. Disathat concluded: “Oil prices in 2021 are likely to rise and become less volatile than in 2020. It is expected that the world will be able to control the spread of COVID-19 by the third quarter of 2021 and the demand for oil will begin to increase significantly in the second half of next year.”
Analysts of PTT Group forecast that if there is no second wave of COVID-19, Dubai crude oil price will increase from an average of US$42 per barrel in 2020 to US$45-55 per barrel in 2021.
