Last year was not what was expected. A violent global pandemic was not on anyone’s radar at the end of 2019. The outbreak of the virus devastated the global economy and the oil market. The devastation can continue until enough vaccines are launched to completely end the pandemic, which can take some time.
Given that background, here are some things to keep an eye on. oil market this year.
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See if demand returns as expected
Demand for oil fell off a cliff earlier this year, as governments limited travel and commercial activities to slow the spread of the virus. This caused a huge excess of oil, with oil storage terminals all over the world. The oil market will enter 2021 with 625 million more barrels in stock than it had before the pandemic, according to the International Energy Agency (IEA).
On a more positive note, the IEA anticipates that oil demand will recover strongly in 2021. Currently, it expects oil consumption in the global economy to increase by 5.7 million barrels per day (BPD) to an average of 96, 9 million BPD. This forecast implies that the economy will recover about two thirds of the lost demand.
If that demand does not return in 2021, oil prices could fall again, putting more pressure on oil stocks.
Keep an eye on the OPEC supply agreement
Supply is the other side of the oil market equation. OPEC and other major oil-producing nations are currently planning to retain 7.2 million BPD from January to March to help the economy burn its excess inventory. This represents a 9.7 million reduction that started in May, which decreased to 7.7 million BPD in August.
The group plans to schedule additional increases in supply throughout the year, with the aim of bringing back 2 million BPD by the end of the year. However, the group had disagreements along the way, which meant that it added 500,000 BPD of additional supply in January faster than some countries wanted. If the group brings supplies back faster than demand recovers, oil prices could fall, which could raise oil stocks once again.
Look for more oil mergers
This year’s crash in the oil market has forced oil companies to shift gears. They need to cut costs to face the continued turmoil in the oil market. One way to do this is through mergers that increase their scale and reduce expenses. The sector saw a wave of mergers in 2020 with the aim of reducing costs.
Oil giant Chevron (NYSE: CVX) kicked off the current wave in July by acquiring Noble Energy in a $ 13 billion all-share transaction, including Noble’s debt. Chevron expects this combination to generate $ 300 million in annual cost savings. ConocoPhillips (NYSE: COP), Pioneering natural resources (NYSE: PXD), Devon Energy (NYSE: DVN)and Diamondback Energy (NASDAQ: FANG) followed this plan by agreeing to acquire rivals in similar businesses that will increase its scale and reduce its costs.
More mergers are likely to occur in 2021. Analysts believe oil producers Cimarex Energy (NYSE: XEC), Continental Resources (NYSE: CLR), Marathon oil (NYSE: MRO)and Apache (NASDAQ: APA) everyone would benefit from a larger scale. Meanwhile, the midstream sector may begin to consolidate in 2021. It lacks organic growth because the oil industry is unlikely to need much new infrastructure in the years to come. This can lead to links between MLPs focused on the collection and processing of oil and gas with large integrated participants, as well as corporate mergers between large pipeline companies. These moves would increase their scale, allowing them to leverage their existing footprints and extract more money from those assets.
2021 could be another turbulent year
The oil market expects to have a big chance in 2021, as vaccines are launched, which should boost demand recovery. As long as OPEC does not advance much, oil prices are expected to continue to improve, which could oil stocks fuel to recover in 2021, especially as the industry continues its wave of consolidation.
However, the oil market is fragile. Problems with the implementation of vaccines or the increased supply of OPEC could put further pressure on oil prices next year. Given these risks, investors must prepare for yet another challenging year in the oil market.