The past year has not been playing out as most expected. A raging global pandemic was on nobody’s radar at the end of 2019. The outbreak of viruses has devastated the world economy and the oil market. The devastation may continue until enough vaccines are spread to completely end the pandemic, which could take some time.
Given the background, here are some things to keep in mind in the oil market this year.
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See if the question bounces back as expected
Demand for oil fell off a cliff earlier this year as governments curtailed travel and business activities to slow the spread of the virus. This has caused an enormous amount of oil with crude storage terminals around the world. According to the International Energy Agency (IEA), the oil market will enter 2021 with 625 million more barrels stored than before the pandemic.
On a more positive note, the IEA expects oil demand to bounce back sharply in 2021. He currently expects the world economy’s oil consumption to rise by 5.7 million barrels per day (BPD) to an average of 96.9 million BPD. According to the forecast, the economy will recover about two-thirds of the lost demand.
If this demand does not return in 2021, oil prices could weaken again, putting more pressure on oil supplies.
Monitor OPEC’s offer agreement
Supply is the other side of the oil market equation. OPEC and other major oil-producing countries currently plan to hold back 7.2 million BPD from January to March to help the economy burn off its surplus stock. This is greater than a reduction of 9.7 million that started in May, which increased to 7.7 million BPD in August.
The group plans to address additional supply increases over 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 led to it having to add 500,000 BPDs of additional inventory faster in January than some countries wanted. If the group returns faster than demand recovers, oil prices could tumble, which in turn could increase oil supplies.
Search for more oil mergers
This year’s crash in the oil market has forced oil companies to shift gears. They need to reduce the cost of enduring the continuing turmoil in the oil market. One way they can do this is through mergers that increase their scale and reduce expenses. The sector experienced a wave of mergers in 2020 to reduce costs.
Oil giant Chevron (NYSE: CVX) kicked off the current wave in July by acquiring Noble Energy in a $ 13 billion share deal, including Noble’s debt. Chevron expects the combination to generate $ 300 million in savings annually. ConocoPhillips (NYSE: COP), Pioneer Natural Resources (NYSE: PXD), Devon Energy (NYSE: DVN), en Diamondback Energy (NASDAQ: FANG) followed the blueprint by agreeing to acquire competitors in similar transactions that would increase their scale while lowering their costs.
More mergers are likely to take place in 2021. Analysts believe that oil producers Cimarex Energy (NYSE: XEC), Continental resources (NYSE: CLR), Marathon oil (NYSE: MRO), en Apache (NASDAQ: APA) will all benefit from larger scale. Meanwhile, the midstream sector could begin to consolidate in 2021. It lacks organic growth because the oil industry is unlikely to need too much new infrastructure in the coming years. This can lead to bonds between MLP’s focused on the collection and processing of oil and gas with larger integrated players, as well as corporate mergers between major pipeline companies. Such moves will increase their scale, enabling them to leverage their existing footprints and squeeze more cash out of assets.
2021 could be another turbulent year
The oil market hopes to get a big chance in the arm in 2021 as vaccines roll out, which should fuel a recovery in demand. As long as OPEC does not move too fast, the oil price should improve, which can give oil stops fuel to bounce back in 2021, especially as the industry continues its wave of consolidation.
However, the oil market is in a fragile state. Issues rolling out vaccines or OPEC’s supplies could put oil prices under renewed pressure in the coming year. Given the risks, investors need to focus on another challenging year in the oil market.