Oil price forecast 2021 and beyond: can oil become a lucrative investment again?
16:35, 26 October 2020
Crude oil had enjoyed its premium status of a sound financial asset for years, with some even comparing its intrinsic value to that of gold. However, things have changed in 2020. The performance of crude oil so far this year can be described as anything but stable. The US targeted assassination of Iran’s most powerful military commander, the ongoing Covid-19 pandemic and the Saudi-Russia oil price war have been among key factors contributing to the commodity’s wild ride.
One of the most memorable days for the market was April 20 when US crude oil, or West Texas Intermediate (WTI) futures tumbled to -$37.63, slipping into negative territory for the first time in history. As the commodity plummeted against the background of a significant drop in global demand and immense oversupply, many investors have chosen to run for the exit.
Ever since, crude oil has managed to recover some of its losses, with a barrel of WTI trading at $40 and Brent Crude hovering around $42 per barrel in the spot market. But does it mean that the “black gold” has restored its value and can be a good addition to one’s investment portfolio? What does the future hold for crude oil as we head towards 2021?
In this article, we recap the commodity’s performance throughout 2020 and take a look at what the crude oil price forecast for the next year and beyond looks like.
The rise and fall of crude oil: how one year can change everything
It all started in September 2019 when a major Saudi Arabian oil processing plant was attacked by a series of explosions. The damage saw the country’s oil output shed by 50 per cent, or 5 per cent of the world’s daily global oil production. The market reacted promptly, sending the commodity’s value up by nearly 15 per cent.
The prices then fell lower only to pick up on another uptrend that started in October and continued into 2020, culminating in early January. Within days of the New Year, oil prices skyrocketed, driven by yet another geopolitical conflict. The US targeted assassination of Iran’s General Qasem Soleimani in Iraq saw the commodity inch higher: on January 6, WTI hit $63 per barrel, while the price of the global benchmark Brent Crude reached a valuation of $70. However, as the tensions between the US and Iran de-escalated quickly, the oil price trend changed its direction to downwards.
Then, the novel coronavirus pandemic hit the world. As the disease continued to spread across the globe, it became apparent that oil demand would soon plummet as nations were forced to go into lockdowns, bringing industrial activity, tourism and overall economies to a grinding halt. Many analysts were quick to change their outlook, with oil price expectations for the rest of the year being far from positive.
As if the market was not struggling enough, the following dispute between two of the industry’s leaders, Saudi Arabia and Russia, saw oil prices fall even lower. On March 6, Russia reported it would no longer cut production as per Opec’s earlier agreement. In response, Saudi Arabia announced it would increase its oil output, leading to the infamous Saudi-Russian price war. By March 31, WTI crude had dropped to $20 per barrel, and Brent Crude oil traded at $22.74, the lowest level since 2002.
While the commodity’s performance in the first quarter of 2020 was rather disappointing, the worst was yet to come.
To support prices, on April 12 Russia and Opec agreed to lower oil output. However, only a few days later, on April 20, the price of the WTI crude futures contract for May plunged to -$37.63. In the spot market, Brent hit rock bottom on April 22, falling to $17 per barrel.
The commodity then gained an upside momentum that had lasted up until late August. By the end of summer, WTI was changing hands at around $43 per barrel, while Brent Crude traded at $46 per barrel.
A sharp sell-off followed, pushing oil prices below the $40 mark in early September. The commodity has since fluctuated dramatically. At the time of writing, October 26, a barrel of WTI cost $38.50, while that of Brent crude – $40.60.
Due to the unprecedented volatility in crude oil, the entire energy sector has been under pressure. Numerous businesses operating within the industry had to file for bankruptcy this year. Some of the most prominent ones were Echo Energy Partners, Skylar Exploration and Diamond Offshore. In the meantime, the Energy Select Sector SPDR ETF that tracks the sector’s performance has shed nearly half its value year-to-date.
While the global economy has been recovering at a lower-than-expected pace, the second wave of Covid-19 has crept up on the world. Does this mean that future oil prices will continue to disappoint investors? Or will oil price rise to their previous highs against all the odds?
What is your sentiment on GS?
Is this leap year really the one to be blamed?
Talks about the looming end of the oil era have been circulating for years. However, the commodity’s demand had stayed strong, averaging at 98m barrels per day in 2018 and increasing to 100.1m barrels per day in 2019. Many expected this figure to grow in 2020.
While some blame the pandemic for the commodity’s great fall, the pandemic has only added fuel to the fire of an already suffering industry. Already in 2019, the demand growth was significantly weaker than predicted. In the meantime, the global oil refining capacity has been on a hike, bringing fierce competition for the industry. Thus, markets had been dealing with oversupply long before the Covid-19 outbreak.
The recent news that Opec output has slightly risen and Libyan production is now returning to the market frightened investors. Commenting on the oversupply and production cuts, Helima Croft, managing director and global head of commodity strategy at RBC Capital Markets, said: “There are still these serious headwinds for oil in terms of the macro outlook. Opec is very focused on compliance. It’s just a question to me of how much more can you get out of these producers in terms of compliance.”
In addition, the industry’s inability to address the world’s growing need to curb emissions to accelerate the clean-energy transition and deal with global climate change will also likely have a negative impact on the commodity’s price in the long run.
Does it mean you should rush to check the commodity off your investment list? Or is there still a chance that the oil price outlook might brighten up?
Oil price forecast 2021 and beyond: should you fasten your seatbelts for another bumpy ride?
For the last quarter of 2020, oil prices are predicted to be held back by a still-recovering economy and a stagnation in global travel, according to John Kilduff, founding partner of Again Capital. Kilduff said: “If anything, they’re vulnerable to falling into the low $30s. The oil market is taking Covid the hardest of all of the asset classes out there. Demand is just not coming back, especially for jet fuel.”
Bank of America also sees oil prices remaining capped in the mid-$40s range for the rest of the year. Francisco Blanch, global head of commodities research at Bank of America Merrill Lynch, said: “In terms of downside risks, a big second Covid-19 wave was always going to rank first, but a warm winter now ranks second given the persistent surplus in distillate fuels.”
In their short-term crude oil forecast, Blanch predicts little price action, noting that the commodity cannot gain significant momentum until the demand for distillate, including jet fuel, recovers.
But what about the commodity’s performance next year? Will oil prices rise in 2021? The analysts have split in two. Polled by The Wall Street Journal, 10 investment banks shared their views on the market’s future. Based on their predictions, in the fourth quarter of 2021 Brent crude futures will average $53.50 per barrel, while WTI futures will average $50.31 per barrel.
While these figures represent a possible rally of $10 per barrel from the current prices, they still remain below pre-Covid-19 levels.
For instance, in their Brent oil price forecast, analysts at Goldman Sachs see the commodity surging to $65 per barrel by the third quarter of 2021, right before ending the year at $58. According to their WTI oil forecast, a barrel of US crude could hit $55.88 next year.
In a note released on August 30, Goldman Sachs said: "There is a growing likelihood that vaccines will become widely available starting next spring, helping support global growth and oil demand, especially jet."
Russia’s Energy Minister Alexander Novak remains rather optimistic, expecting oil demand to fully recover from the Covid-19 aftermath by the second quarter of 2021. Alexander Dyukov, the CEO at Gazprom Neft, Russia’s third-largest oil producer, also believes that global oil demand will return to its pre-pandemic levels in the second half of 2021.
Analysts at Citigroup predict Brent Crude to average around $55 per barrel next year and hike to $60 per barrel by the end of 2021. WTI crude is forecast to jump to $58 per barrel by the end of the next year.
In the meantime, there are a few analysts that do not share such bullish views on oil price forecasts.
According to Walletinvestor’s oil projections, the commodity is expected to lose in value significantly. The service sees Brent Crude ending 2021 at $21.57 per barrel, while WTI is forecast to close the next year at $30.99.
Based on the oil price prediction provided by Longforecast.com, WTI is expected to close December 2021 at $38.89 per barrel, while Brent oil is prognosed to end 2021 trading at $45.66 per barrel. Looking a few years ahead, US crude is forecast to rise to $53 per barrel by October 2024, with a barrel of Brent soaring to $64.74.
Are you bearish or bullish on the commodity? What do your future oil price predictions look like? Will the oil price go up?