Brent, the global crude oil benchmark will end the year 2020 at about US$50/b. Compared to its price level at the start of the year, that’s a fall of some 17%. But absolutes like that do not tell the story of the extraordinary year that was 2020. In between January and December, an oil price war was started, crude oil prices plunged as the coronavirus pandemic swept across the globe. The WTI benchmark briefly fell into negative pricing and the OPEC+ club agreed to a historic supply agreement that slashed nearly 10 million barrels per day of supply from the global market. All of that led to a gradual recovery in crude oil prices, with Brent doubling from its nadir of US$24/b in mid-April 2020. The question now is: what happens in 2021?

There are a lot of assumptions that need to underpin any prediction of crude price trends. And, therefore, it is best to address those before making any pronouncements.

First, demand. With Covid-19 vaccinations programmes rolling out, it is very likely that the global GDP will return to some semblance of normality by mid-2021. Planes and trains will somewhat start flying regularly again, while the travel and hospitality sector will return. In some parts of the world, this has already started to happen. In China, where the pandemic originated, the domestic economy has been pretty much restored and oil demand is now exceeding pre-Covid levels. Other Asian economies are following suit, as the pandemic comes under control. At some point in 2021, the full opening of international borders will follow suit. But there is a new wrinkle in the story. Two new variants of Covid-19 have been discovered recently in the UK, with both thought to be nearly twice as infectious. Travel originating from the UK was blocked as governments panicked over importing the new variants, even as inoculations were rolled out worldwide. So any progress in restoring the global economy and oil consumption trends, could be derailed by ongoing mutations in the virus, especially if any newer variants prove to be resistant to the current vaccines that have been developed.

But, on balance, 2021 should be a year of regrowth, with oil consumption following suit. Depending on the intensity of recovery, world oil demand could rise by between 5-7 mmb/d. That won’t be enough to offset the 9 mmb/d decline in 2020, but will do enough to drive crude oil prices higher. Assuming that the supply situation does not break down.

Alas, that is a possibility. The year 2020 proved to be a year of identity crisis for OPEC+, the producer club that controls over 50% of global crude oil production. After several years of beneficial cooperation that allowed crude prices to recover to US$60/b levels, a spat between OPEC+’s two giants – Saudi Arabia and Russia – triggered a price war to devastating consequences. Bruised egos aside, the immediate aftermath did not prevent the two countries coming together to announce the largest crude oil supply quota deal ever in April. But the scars still remain, driving a wedge between the Saudis and the Russians despite their mutual dependency. Grouses over the quota allocations have also made fresh wounds: culprits like Nigeria and Iraq continue to be blamed for flouting their targets, as was the UAE, formerly a loyal supporter in OPEC’s Saudi faction, which has publicly threatened to leave the group.

All of this has implications for the crude oil supply trend in 2021. In November, it was presumed that OPEC+ would postpone the taper of its supply deal by several months, citing ‘fragility’ of demand. The opposite happened. At a fraught bi-annual meeting, OPEC+ will now switch to a monthly review of quota revisions, allowing for a 500,000 b/d increase in overall production in January and (presumably) increases of the same amount for February and March. But as much as OPEC+ can do, there are factors beyond its control. Libya, an OPEC member does not have any formal quotas, an exception granted as it recovers from a prolonged civil war with production now returning to full strength. US shale is also starting to recover in selected areas. The refining industry, especially in Europe may have remade the balance of fuel supply and demand in ways that are difficult to predict right now.

The picture emerging for 2021 in the short term, is for a demand-led recovery for crude prices, with the main challenge being for supply to throttle its own recovery to keep pace but not exceed the demand curve. If OPEC+ can hold together to continue to play this role, then crude oil benchmarks should stay within the US$50-60/b range in 2021. That won’t be enough to appease everyone, but it should be good enough to keep the industry chugging along and restart some upstream investments. It could be argued that this 2021 prediction may be too optimistic; but we need to move forward from all of the pessimism in 2020 at some point. At least that’s the plan.

Market Outlook:

• Crude price trading range: Brent – US$49-51/b, WTI – US$47-49/b
• Global crude oil benchmarks remain rangebound at elevated levels, as the market enters the year-end lull and traders watch for signs of demand recovery and coronavirus developments in key markets
• Russia has signalled that it will support a further increase in OPEC+ production at the group’s next meeting, making it likely that output will be raised by another 500,000 b/d from February 2021 onwards