Home > A Constructive View for the 2021 Oil Market

A Constructive View for the 2021 Oil Market

2020 meant for oil pretty much what it meant for every one of us – chaos, unknown, despair, uncharted territory. For the first time in history, the world found out that the price of a commodity can settle in negative territory if there is no storage space left in the world. 

The price of oil did so in April 2020. The day will have its place in history books, no doubt about that. Moving forward in 2021, things changed for the oil market, and the prospects for higher oil prices look even constructive.

What to Expect in 2021 from the Oil Market?

Inventories should come back to more normal levels, given the efforts of the OPEC+ members. Also, demand should pick up as the prospects for effective vaccines improved significantly.

OPEC+ made some extraordinary efforts to bring the oil market back and to stabilize it. For once, having a cartel dictating the prices paid. One should remember the impact energy prices have on monetary policy worldwide, as lower oil prices weigh on inflation.

The changes in production level and the efforts to control output are likely to remain in place for the first quarter of the new year. Also, the U.S. managed to restart almost its entire production, while Norway still has some fields that will restart soon. All in all, from the known supplies, few surprises should appear.

The big unknown for the oil market in 2021 comes from the demand side. COVID-19 takes its toll on economic activity, with Germany entering a hard lockdown as we speak. Europe is suffering a terrible second wave of infections, with the number of deaths in Germany reaching a record high yesterday.

As such, despite promising vaccines, the chances are that the economic underperformance will continue well into the next year. For how long, no one knows, and that is a risk for future oil prices, especially in the first half of the year.

Another thing to consider comes still from the supply side. This time, from an unusual place – Iran. If the new administration in the United States returns to the nuclear deal with Iran, then it will lift some sanctions. Therefore, the oil market may see a surplus of about 1.5 million bpd or more, enough to weigh on prices.

All in all, 2021 looks constructive for the oil market. A $50-$60 range should not be discounted.

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