Black gold will still be a major topic for the global economy in 2021.

After falling about 4% this week as a new, fast-spreading strain of coronavirus spooks markets over the outlook for demand, oil futures will have finally lost about 6% on the year. The black gold will have been a major subject of concern, a thermometer of the world economy with its own parameters at the origin of important episodes between the geopolitical tensions of March to know if it was necessary to reduce the production of the producing countries and of their partners (OPEC+), then an agreement on historic cuts of -10 million barrels/day (mbd) on April 10, and an unprecedented low to “symmetrically” negative prices on April 20, at the peak storage problems that made financial traders fear that they would be delivered without having the necessary space when the contracts expired.

A market

demand driven

“In March, the Russians refused too rapid a cut of -1.5 mbd because they first wanted to see, rightly, the scale of the crisis so that the reduction in production could, unlike 2008, have a real effect in the face of demand (which fell from 98 to less than 75 mbd between January and April, editor's note)”, recalls Benjamin Louvet, manager of commodities funds at Ofi AM. After April's trough, prices plateaued from June to October and then returned to their level of early March, around 48 dollars/barrel for US WTI crude and 50 dollars/barrel for Brent.

The markets now seem a little too optimistic about the rise expected for the start of 2021, during which prices will still be driven by demand and growth. For example, air traffic will not be able to return to its pre-crisis levels in the short term: it had returned to only 60% before the new restrictions. “It should be added that the Chinese were opportunistic and supported demand by taking advantage of low prices in May, but they will now manage surpluses, notes Benjamin Louvet. In addition, as refinery margins are very low today, it is not in their interest to order raw materials, but more to work on destocking.

The specialist manager adds, in the face of these demand problems, several factors that could affect supply: the effective return of Libyan oil, which has risen from 0.3 to 1.3 mbd in recent weeks; the OPEC+ production increase of 0.5 mbd in January (the cuts will come back from -7.7 mbd since September to -7.2 mbd), and probably in February too, in particular to meet strong Asian demand for the “heavy” oil of these countries; the possible return of 1.7 mbd of Iranian oil to export if the new US administration of Joe Biden accepts a new Iranian nuclear agreement (JCPoA) which would amount to lifting the sanctions. For all these reasons, it would not be impossible to see prices fall by at least another 10% in the coming months – the OPEC+ countries estimate that they will intervene below.

45 bankruptcies in 2020

in the American shale

The only "positive" point on short-term supply: while it is "light" oil from American shale oil that the world needs the least, it is also he who suffered the most in 2020 and should suffer further in 2021. “Already in difficulty after having never generated positive cash flows between 2008 and 2019 on an industry scale, this oil which requires significant investments, is experiencing serious financing problems which are already impacting production, which has fallen from 13 mbd in 2019 - a level that many believe will never return - to 10 mbd in 2020, and potentially less than 7 mbd at the end of 2021", continues Benjamin Louvet, referring to the bankruptcies of American companies in the sector. (more than 45 in 2020 for more than 600 billion in cumulative debt, and many expected in 2021), and consequently the division by three of the number of drills (260 now) and extraction teams (145).

In the longer term, if vaccines allow the economy and global demand to normalize, the trend would be quite different, since traditional oil would also find itself lacking investment to renew its production (there is a lag 4 to 5 years before realizing the benefits). A better health situation could induce a fairly strong rise in prices after the third quarter, for example up to 100 dollars/barrel, even if analysts estimate the intrinsic value of black gold rather between 70 and 80 dollars/barrel.