WTI Crude Oil
The coronavirus pandemic put significant pressure on the oil market in 2020, but oil will start the year 2021 in a decent way.
The main support catalyst for oil now is vaccine optimism. Traders believe that mass vaccination in developed countries will soon bring the pandemic under control, so that their economies will recover strongly and demand for oil will increase.
Although the first quarter of 2021 is expected to be challenging due to continuing problems on the virus front, demand is expected to gradually increase over the coming quarters.
Currently, OPEC expects world oil demand to reach an average of 95.89 million barrels per day (bpd) in 2021, but will reach 97.29 million bpd in the fourth quarter of 2021.
The lack of demand for travel is the biggest problem for the oil market at the moment. Given this, the new coronavirus strain that emerged in the UK can present a significant challenge if it spreads to other countries. In this scenario, more borders will be closed and fewer planes will fly.
However, most experts believe that vaccines should be effective against this new strain and other potential mutations in the coronavirus, so any additional problems should be temporary. At this point, it looks like oil demand will be ready for a material recovery by the time the driving season starts in 2021.
The situation is also interesting on the supply side, as OPEC + will have to carefully assess the fundamentals of the market, while trying to bring its production closer to normal levels. The group will increase production by 500,000 bpd in January, but may have to pause after this increase due to weak demand in Europe.
The main task of OPEC + is to maintain discipline, despite the increase in oil prices. OPEC + members do not want to provide US shale with additional market share, but recent data indicates that US production is not increasing.
The EIA expects U.S. domestic oil production to remain close to the current level of 11 million barrels per day. If this forecast is correct, OPEC + will be able to gradually increase its production levels, without exerting significant pressure on the market.
I would also note that compliance with the OPEC + production cut agreement is likely to deteriorate in 2021 as OPEC + members will try to increase their revenues, but it should remain at high levels, as all countries understand the fragility of the current supply / demand balance.
In addition to growing demand and responsible supply, the oil market could benefit from the weakness of the US dollar. The US currency remains under significant pressure, and further losses will provide additional support for commodities, including oil.
The main risk to the oil market is the uncontrolled continuation of the coronavirus pandemic. This is a big wildcard, but it looks like the current vaccination effort should be enough to bring life back to normal by the summer of 2021.
As usual, traders will continue to monitor all developments on the stock front. According to the recent EIA Weekly Petroleum Status report, U.S. oil stocks are about 11% above their five-year average for this time of year, so there is a lot of work to do. When oil stocks fall close to normal levels, oil could gain more ground.
In all, the current configuration seems optimistic for oil, despite the current problems on the demand side. OPEC + has proven its ability to coordinate production cuts, countries have started to implement mass vaccination programs and stock levels are decreasing. Given this, the year 2021 has the potential to bring good news to the oil bulls.
Natural gas
The natural gas market has managed to recover from the lows reached in the first half of 2020 and will try to remain at higher levels in 2021.
Domestic demand for natural gas is expected to remain weak. According to the EIA, it is estimated that natural gas consumption in 2020 will fall by 2%, followed by a 4.8% drop in 2021.
In this situation, natural gas prices will mainly depend on two main factors – the amount of US natural gas production and the strength of LNG export demand.
The EIA believes that US natural gas production will be under pressure this winter, but will begin to recover in the second quarter of 2021. However, it remains to be seen whether this recovery will be strong as energy companies have suffered serious coup in 2020 and will likely remain cautious with their investment plans in 2021.
Meanwhile, LNG exports continue to increase. In November, the US exported 9.4 Bcf / d of LNG, which was a monthly record. Most analysts expect LNG demand to continue to rise, which will be optimistic for domestic natural gas prices.
Without the support of LNG exports, the domestic market will soon be under pressure from overproduction, so the continued increase in LNG exports is vital to the health of the domestic market.
The EIA expects spot prices for natural gas to average $ 3.01 / MMBtu in 2021, which will represent a major improvement over the price levels seen in 2020. As usual, weather will continue to be an important factor , but the financial situation of US energy companies is expected to play a bigger role.
It is hard to believe that American companies will rush to produce as much gas as possible after a very challenging year, so the supply is likely to be more responsible compared to previous years.
In addition, investors are clearly not ready to finance another round of expansion after being burned several times, which is good for the market’s long-term health.
The current configuration seems moderately optimistic for the natural gas market. The weakness in domestic demand is likely to be offset by increased LNG exports and conservatism on the supply side.
At the same time, the market does not appear to be ready for any major spike. As usual, the natural gas market will be very volatile from time to time, but there are no catalysts for a major sustainable price increase. That said, surprises are always possible, and the market may continue to experience strong price swings in 2021.
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This article was originally posted on FX Empire