S&P Global Platts Analytics’ 2021 Energy Outlook
Chris Midgley, global head of analytics, S&P Global Platts, commented, “The positive news over the emergence of an effective COVID-19 vaccine has created a wave of optimism across commodity markets despite the fundamentals extensively being unchanged. While in the long-term we are more optimistic about a rebound of oil demand, causing us to upwardly revise our 2021 demand outlook, in the short term, we expect things to worsen, with increased second-wave lockdowns in U.S. and Europe resulting in much weaker gasoline demand across the holiday season.”
The group’s 2021 forecasts for oil, which considers the continued presence of COVID-19, is a bumpy ride for demand. Oil demand is expected to rebound by more than 6 MMbbld in 2021, but consumption is still foreseen to be more than 2 MMbbld below that of 2019’s 101.9 MMbbld. The reasoning behind this: the global middle class, the real engine of oil demand, faces continued pressures from wealth inequality and the ongoing COVID-19 cloud. Also, widespread vaccine deployment is unlikely until the second half of 2021, which won’t prevent periodic lockdowns for several months.
With the sharp reduction in air travel, kerosene/jet fuel demand represented more than a third of the overall demand decline in 2020, falling by 3.1 MMbbld. Jet fuel will remain weaker going forward, keeping distillate supply more in surplus through the first half and refineries operating more in gasoline-production mode.
OPEC+ will be the dominant factor for 2021 oil supply. Libyan supply will continue to defy expectations, rising to 1.2 MMbbld, subject to the tenuous ceasefire. With a new U.S. administration, supply upside could come from Iran and Venezuela, though progress promises to be slow. It is believed that it will be increasingly difficult for OPEC+ to walk the tightrope between volume and price, with the organization looking to both increase revenues and prevent a sizeable rebound in U.S. market share. When looking at U.S. oil production, it appears set to decline another 1 MMbbld in 2021 on a year-over-year basis due to steep declines in the shale base, with slow pick up in rigs/frack crews.
As far as oil prices, fundamentals overall, will resume the ascendancy over sentiment, which should see Dated Brent oil prices soften in the short-term to the low $40s/bbl area, but should prompt a price move toward $50/bbl by the end of 2021, with WTI to recover to just under $50/bbl. However, caution is warranted, given the uncertainties regarding robust OPEC spare capacity and COVID-19 vaccine deployment.
Another element to consider is the squeezed refiners who need a demand outlet or face closure: Even assuming a rebound in refined product demand in 2021, growth in refining capacity, largely in the Middle East and Asia, will be far larger. A continued influx of biofuels and NGLs supply will continue to weigh on crude run rates in 2021. This will squeeze margins of existing refineries, particularly if demand recovery for transportation fuels remains sluggish. Refinery closures are inevitable. Refineries well placed to survive will have a focus on costs, local markets, and integration with petrochemicals or transformation into bio-refineries.
SOURCE: The Weekly Propane Newsletter, December 17, 2020. Weekly Propane Newsletter subscribers receive all the latest posted and spot prices from major terminals and refineries around the U.S. delivered to inboxes every week. Receive a center spread of posted prices with hundreds of postings updated each week, along with market analysis, insightful commentary, and much more not found elsewhere.
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