One of the largest economic shocks that have marked 2020 was the tremendous decline of oil prices that broke the minimums of 2016 and reached the levels of 2003 [Markets.businessinsider.com, 2020]. In 2020, the estimated oil demand dropped by unprecedented 9.7% compared to 2019 [OPEC, 2020]. Strict quarantine measures, as a response to the global spread of COVID-19 pandemic, halting many different types of economic operations have shrunk oil demand, driving the prices to minimums. The dramatic price decline in the oil market was preceded and exacerbated by disagreements on oil supply cuts between Saudi Arabia and Russia at the meeting of the OPEC on March 6, 2020 [Usnews, 2020]. The supply chain disruptions in the oil market associated with the inelasticity of production and storage tanks filled to capacity dropped the prices to ridiculously low levels in terms of market factors to the point that the world has seen even negative oil prices in the futures market during April of 2020 [CNBC, 2020].
However, the oil market started its sluggish recovery during summertime as most of the main oil-consuming countries abandoned strict lock-down measures allowing many energy-based economic activities to operate again. As of December of 2020, the price of Brent crude oil on the futures market consolidated at around $50 per barrel and continues its gradual ascending trend. The upward trend of the prices in the oil market reflects the positive expectations of consumers and producers regarding the recovery of the global economy. The positive expectations regarding the recovery of the oil market are primarily propelled by the advancements in producing COVID-19 vaccines all around the world. It should be admitted that vaccines that were tested in clinical trials and approved for use became available earlier than was expected at the beginning of the pandemic and there will be more vaccines available for use in the near future.
According to global projections by the World Bank, oil prices will recover in 2021 increasing by 18.8%. The average oil price is expected to be at $38 per barrel in 2021 compared to $32 in 2020 [World Bank, 2020]. The IMF, on the other hand, forecasts a 12.0% increase of the global average oil price in 2021 [IMF, 2020]. The December-2020 report by the OPEC estimates the global oil demand to increase by 5.90 mb/d and reach 95.89 mb/d in 2021 [OPEC, 2020]. The projected price rebound in 2021, however, is still well below the price levels that were in 2019 before the COVID-19 crisis (99 mb/d) [OPEC, 2020a]. The partial recovery of the oil market and its price is not very likely to last into longer term perspectives. It is mainly fueled by revitalization of the economic activity after lockdown and quarantine measures all over the world and investments that were postponed due the COVID-19 crisis.
Figure 1. Global oil demand since 2000 (mb/d)
Source: Monthly oil market report, December-2020
In the meantime, the future of the oil market looks extremely obscure in longer-term perspectives. There is no reason for oil demand to grow fast after the expected rebound in 2021, after which there will probably be a deceleration of the oil demand below 1 mb/d [IEA.org, 2020]. The high uncertainty of the oil market in the long-run is due to serious transformation that the oil market has had during recent years. Interestingly, the COVID-19 crisis accelerates the current processes of transformation and helps to set new trends that will determine the functioning of the oil market in the future.
One of the factors that make oil projections uncertain is the future of OPEC. The COVID-19 crisis without any doubt has been one of the most serious challenges for the oil cartel since its foundation and 2020 might well become a turning point in its history. The market share and market power of the OPEC in the global oil market have been diminishing over the last 20 years. For instance, the share of the OPEC in crude oil production has fallen from 36.3% in 2000 down to 29.4% in 2019 [OPEC, 2020]. Recent price drops under conditions of decreasing market share of the OPEC not only weakened its market power, but also stirred up distrust among its key members jeopardizing the sustainability of the organization. Unsuccessful negotiations between Russia and Saudi Arabia on production cuts in March of 2020 and subsequent talks between the two key players of the cartel was a striking example of it. Generally, we can see that the OPEC members eagerly accept decisions to increase the production and when it comes to production cuts they have difficulties in implementing the decision.
Another major pattern that has probably already started is the change of demand for oil. As it was mentioned, there is an expected recovery of demand in 2021-2022, which might be the last major demand growth in the next 1-2 decades. A gradual deceleration of the demand growth after 2022 can be a path towards a plateau around 2030 [Bloomberg.com, 2019; OPEC, 2020]. In this case, this would be a major turn in the evolution of the oil market because, over the last several decades the global oil market has existed under conditions of growing demand with only short-term drops during periods of crisis. Not only the size of demand but also the structure of it is expected to change drastically as the demand growth dwindles. The oil demand contraction during 2020 was mainly due to the decline in the transportation sector, which constituted around 40% of the demand before the COVID-19 crisis [About.bnef.com, 2020]. The reason for the contraction of demand in transportation in the future will come as a result of fuel efficiency and rise of alternative non-fossil fuels for transports, and not due to the decline in the sector.
Another change that the oil market is about to experience in the mid-term and longer-term perspectives is the geographic shift of consumers and, to a lesser extent, of producers. Despite skepticism, most of the major oil consumer-regions such as the EU, the UK and other developed economies are making considerable success in reducing the share of fossil fuels in their energy sector and setting new ambitious goals to be reached in the foreseeable future. For instance, the UK decided to ban the sale of non-hybrid cars run by fossil fuels from 2030 [Europe.autonews.com, 2020]. The EU commits itself to reduce emissions to 55% of 1990 levels by 2030 [European Commission, 2020]. Canada recently released a comprehensive plan aimed at reducing greenhouse gas emissions and increasing the energy use [CBC.ca, 2020], which will put heavy pressure on the fossil fuel market. Therefore, the consumption part of the oil market will continue to shift from developed states to developing economies.
We can see that the turmoil caused by the crisis in the oil market accelerated the trends that had emerged before that. Therefore, the situation in the global oil market created during the COVID-19 crisis should not be understood as a temporary crisis event. It might well be an approximate model of the realm to come a decade from now.
References
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Bloomberg.com (2019). Global oil demand will hit a plateau around 2030, IEA predicts. Retrieved from https://www.bloomberg.com/news/articles/2019-11-13/global-oil-demand-to-hit-a-plateau-around-2030-iea-predicts. Accessed on 23.12.2020.
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Organization for the Petroleum Exporting Countries (2020). Monthly oil market report, December-2020. Retrieved from https://momr.opec.org/pdf-download/. Accessed on 23.12.2020.
Organization for the Petroleum Exporting Countries (2020a). Monthly oil market report, January-2020. Retrieved from https://www.opec.org/opec_web/en/publications/337.htm. Accessed on 23.12.2020.
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Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy.