Just like oil exploration, crude oil price forecasting is difficult terrain. It is not an exact science, and therefore a tricky exercise to undertake as unforeseen factors could and always upend the best of projections. But to have a good shot at it is bliss. While the unforeseen may yet render its invisible hand to change the course of events, the short-term oil price outlook based on my analysis, point to a price trend of up to US$60/bbl in 2021. The above conclusion is not without underlying assumptions but before that, a brief review of similar enterprise by the writer in the past, especially before major swings in oil prices, is perhaps necessary.
The year 2014 offered the privilege of advising a consortium of lenders to investors in the Nigerian power sector to convert their dollar-denominated loan to naira, based on oil price projection and what I saw then as an impending significant devaluation of the domestic currency. In April 2020 during the peak of the Coronavirus pandemic, another bold projection was made by the writer on the price of oil at year-end – it was a contrarian view and of course not a popular one.
In the tale of the lenders and their dollar facilities, spirited efforts were made in several lenders’ meetings to drive home the point with sufficient clarity on the urgency of the conversion. Again, at the departure lounge of Usubi Airport in Warri, Delta State, en-route Lagos from Ughelli in one of the site visits, I shared a detailed empirical and qualitative analysis with crude oil price and exchange rate scenarios to further buttress my position. The analysis was termed wild and impossible by representatives of a regional multilateral infrastructure finance institution (one of the lenders) based in Lagos and an Investment Bank that acted as Lead Arranger in the syndication. My views were documented in a newspaper publication for future reference.
Less than a year later, all hell broke loose – the risk crystallized, global oil prices plunged with severe dollar illiquidity in Nigeria, exchange rate tumbled, loan portfolio ballooned overnight causing systemic illiquidity in the power and financial sectors and the economy went into a tailspin. Suffice to say that the gift of clairvoyance was not required to see the imprints of general macroeconomic factors that led to the collapse of power sector reforms in Argentina in the 1990s were about to upend power sector reforms in Nigeria. The Nigerian power sector is still reeling from that singular event to date.
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Again, sharing strategic insights on oil price outlook based on detailed modelling of key variables that could upturn the negative price swing in the peak of the COVID-19 pandemic in April 2020, I projected fifty dollars per barrel oil price by December 2020 in an article published by BusinessDay titled Oil price recovery and the American paradox. As you would generally expect in a moment of unprecedented global crisis, the dominant view by energy economists, policymakers and analysts at that time were, understandably, widely at variance with such a prognosis of sharp recovery amidst key uncertainties in the global economy with WTI prices trending in low and negative territories. A popular newspaper columnist posited that the world may never see a US$50/bbl oil price in our lifetime again. I immediately interjected that the world may indeed see $50/bbl in December 2020. I was happy to send prices for the different crude oil streams to him in the first week of December 2020.
What is clear is that the upward pressure on the demand for oil and the upsurge in crude oil prices in recent weeks reflect its disproportionate share for transportation use in the consumption mix. Therefore, the ease of restrictions after the Great Lockdown and the spike in fuel consumption for transportation coupled with other factors are some of the key drivers of the recent price recovery. To put some perspective around the relationship, road transportation and aviation accounted for about 58% of oil consumed in the OECD countries while the share of petrochemicals stood at 15%. The share of oil consumption for transportation in the sectoral distribution in the United States is much higher at 68%, according to data from the US Energy Information Administration (EIA). Energy transition policies and EVs, in particular, are not expected to alter oil consumption by the transportation sector in the next year in the writer’s view.
In the United States, monthly petroleum products supply, which plummeted to a thirty-seven-year historic low of 14,691 Mbbl/d (thousand barrels per day) in April 2020 (far worse in per capita terms) is on an uptick towards the pre-pandemic levels based on 19,178 Mbbl/d supplies posted in November 2020 compared with 20,736 Mbbl/d in November 2019. Air travel which tanked during the lockdown has seen steep growth (albeit, still far below the pre-Covid 19 figures) in the number of travellers in the United States, Canada, Mexico and across the globe based on industry sources.
What then is the outlook for crude oil prices in 2021? Let’s be clear, the global economy is not out of the woods yet. There are still several chokepoints and tremendous uncertainties to navigate through to full recovery especially against the backdrop of the second wave of lockdown in some countries. While the prospects for higher levels of oil consumption in 2021 looks very likely, public health concerns over a spike in coronavirus infections and new strains in major energy demand centres across the globe pose significant risks and weigh in heavily on short term prospects. Therefore, several key factors will determine price trajectory in the New Year – global economy and international trade outlook, extent and severity of the second wave of lockdown in some countries, broad access to the coronavirus vaccine across the globe and its efficacy in containing new variants.
On the supply side, there is the potential risk of price volatility on the back of investment curtailment and upstream production shut-in in 2020. According to reports, investment in global oil and gas supply dipped by one-third in 2020 when compared with 2019. Though the timing of the lag effect of investment shortfall in 2020 on supply is yet unknown, demand-supply imbalance spawned by a growing global economy and constrained supply could portend an oil price spike in 2021 or perhaps a little farther. Much will also depend on the ability of the OPEC members and Russia to maintain fidelity to the production output pact in 2021. In the final analysis, $60/bbl of oil price is very much within reach in 2021 but will the global economy be too fragile to support a US$60/bbl oil price? Time will tell.
Please note that the opinion in this article is entirely that of the author and should not be construed as advice in any form nor should it form a (primary) basis for any investment decisions. Readers are advised to consider their circumstances in assessing any course of action, be it an investment or otherwise.
Glenn (FCA, FCTI) writes from Lagos.
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