Where Are the Oil Prices Headed in 2021?

WikiFX News (13 Feb.)- There‘s a renewed optimism for a global economic recovery in 2021 on the news of distribution of vaccines in major economies across the world starting in few weeks’ time.

A high confidence in global economic recovery is, typically, considered to bring weakness in the US dollar. A falling US dollar on the back of global economic recovery & continued stimulus spending in the US, as well as other major economies, are bullish for oil prices. In addition, vaccines would allow people to resume life in a normal way supporting more consumption-led spending that would drive up the oil prices.

In the latest Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration or EIA indicates an average of $49/b for Brent in 2021 which is around 14% higher than the expected average for the fourth quarter of 2020. EIA expects that while inventories will remain high, they will decline because of the rising global oil demand and lower than expected increase in OPEC+ oil supply. EIA forecasts Brent prices will average $47/b in the first quarter of 2021 and rise to an average of $50/b by the fourth quarter.

Other key driver for the recent increase in oil prices has been the deal to slowly cut the OPEC production cap in the first quarter instead of 2 million barrels a day. OPEC+ agreed to raise oil supply by 500,000 barrels a day in the next month, well below the 2 million barrels mark.

A positive outlook for the next year doesnt necessarily support a low volatility environment for crude oil prices as over the medium to long term period the uncertainties will remain in the following aspects:

- consumption patterns due to changes in behaviors caused by multiple lockdowns across the globe.

- a slower than expected economic recovery.

- changes in global production of crude oil - OPEC & non-OPEC.

- shape & structure of US-China Trade related alignment.

- the pace of Energy transition, primarily led by leading global economies, towards green energy.

Crude oil prices will continue to demonstrate volatility. Companies that can adapt, deploy and harness the benefits of data and modern risk management processes, tools & technologies will thrive and be best placed to respond to challenges posed by the evolving global economic & political situations.