SINGAPORE – The OPEC oil producer group has kept its forecast for growth in oil demand for 2021 unchanged, due to expectations of an economic recovery. But that could change, warns energy expert Dan Yergin.
Yergin, vice president of IHS Markit, told CNBC on Friday that much depends on the effectiveness of coronavirus vaccines and whether the number of Covid-19 cases continues to increase.
Hopes for increased demand for oil also rose on Thursday when US President-elect Joe Biden released a $ 1.9 trillion Covid-19 rescue package designed to support families and businesses.
In addition to the stimulus package, two factors also fueled optimism, said Yergin. “There are two other things that are happening with this … one is, of course, vaccines – in the sense that, eventually, this crisis will end, and perhaps by spring, the blockages will end.”
“The other thing is what Saudi Arabia has done. This is the third time that Saudi Arabia has made a sudden policy change in less than a year, and this was to announce the cut of 1 million barrels a day – in part because they are concerned about the impact of the increase in the virus that is occurring, “he said.
If vaccines were not as effective as previously thought, you would again have a weaker demand, and that would increase the price.
Dan Yergin
Vice President, IHS Markit
OPEC members and their non-OPEC allies, an alliance known as OPEC +, cut oil production by a record amount in 2020. They did so in an effort to sustain prices, under Covid-19 restrictions throughout the world and the subsequent drop in air travel have led to a shock in fuel demand.
Saudi Arabia, the world’s largest oil exporter, has since said it plans to cut production by another 1 million barrels a day in February and March to prevent inventories from rising.
Yergin said that both the vaccine launch and supply cuts came together to “reduce oil prices from what I was calling the virus alley and trying to recover in 2021”.
Coronavirus risks
Oil prices are in pace with their third consecutive week of gains. US oil was at $ 53.08 on Friday during Asian time, up from $ 48 per barrel in late December, while Brent oil was at $ 55.69 on Friday, compared to above of $ 51 at the end of December.
OPEC said it expects global oil demand in 2021 to increase by 5.9 million barrels per day year on year, to an average of 95.9 million barrels per day. The forecast remained unchanged from last month’s assessment.
In a report released on Thursday, he said his 2021 forecast assumes “a healthy recovery in economic activities, including industrial production, an improving job market and higher vehicle sales than in 2020”.
Yergin, however, warned that demand for oil would depend on how the virus situation develops.
If the increase in coronavirus continues and “if vaccines are not as effective as previously thought, you would have a weaker demand again, and that would increase in price,” he told CNBC’s “Squawk Box Asia” on Friday. “But it is clear that there is optimism in the price of oil.”
‘Second revolution’ for U.S. shale
It is time for the “second revolution” for US shale producers, said Yergin. The sector’s drilling boom catapulted America to the position of the world’s largest oil producer in 2018.
“This is the second revolution for shale, which is returning money to investors. (They are) in a better way to do that. Now you will see consolidation, you will see an ongoing effort to reduce the cost.” he said.
“So I think we will see shale in the United States starting to grow again in production in the second half of this year,” he said, adding the caveat that there are no negative scenarios for coronavirus.
Still, it remains unclear what Biden’s energy policies could mean for the U.S. shale industry.
In December, US Energy Secretary Dan Brouillette warned that US shale producers should be concerned about a “very aggressive” climate policy that will happen with the next Biden government.
Biden may not prohibit fracking, the process of extracting fossil fuel by which shale gas is produced – but he intends to smother it significantly with regulation, say many analysts.
– Sam Meredith, Natasha Turak and Patti Domm from CNBC contributed to this report.