Although only fleeting, when barrel prices dipped into negative territory during the pandemic, it was a sure sign of a global oil sector in turmoil.
A perfect storm of tumbling demand from lockdown restrictions − which paralyzed most, if not all, of the world’s major economies − and abundant oil and gas reserves resulting from the collapse of the OPEC+ agreement, left producers staring at a bleak future.
Since the rock-bottom prices of late April, however, the outlook for oil is much improved. A significant recovery has taken place as economies emerge from their enforced paralysis and − at least in part − are slowly returning to work, while oil output adjustments have stemmed the recent flood of cheap oil onto the market.
Dr Bassam Fattouh, Director of the Oxford Institute of Energy Studies, says this rebalancing of the market is more than just a blip. He says it represents a sustained shift towards market recovery as demand continues to pick up.
“We expect the market to turn from surplus to deficit in the third quarter of this year, and for this deficit to be maintained through the rest of 2021,” he explains.
Although the global economy hasn’t returned to pre-COVID-19 activity levels, things are moving in the right direction to boost oil demand. At the same time, a new OPEC+ consensus produced historic production cuts, while reduced production in major exporters like the U.S. and Canada have helped curb global oversupply.
“All these factors indicate that the recent rally is real and supported by fundamentals,” adds Dr Fattouh.
These sentiments are shared by other energy analysts, including Amrita Sen, Chief Oil Analyst at Energy Aspects, who predicts Brent Crude prices could surge to $66 a barrel in 2021 and reach $83 in 2023, compared with around $43 a barrel in 2020.
Wave of Uncertainty
But with a second wave of coronavirus looming, will forecasts of a sustained oil price recovery come under pressure?
“The long-term impact of coronavirus on oil demand is still hard to predict, so it remains open whether and when demand will ever reach pre-pandemic dimensions,” says Dr Fattouh.
“The weakening of the economy and deteriorating U.S.-China relations, which predate COVID-19, also have to be taken into consideration.”
So, even if demand does return to pre-COVID levels, oil prices look unlikely to regain the highs of their heyday − considering that returns were already at a low before the virus hit.
For other market commentators, trying to predict oil prices is problematic, especially when the future is characterized by such high levels of economic, technical, and policymaking unpredictability.
“The future is uncertain, nobody knows [what oil prices will look like],” says Mark Finley, Fellow in Energy and Global Oil at the Baker Institute Center for Energy Studies (CES).
“Coronavirus has merely added another layer of uncertainty.”
Finley adds that the pandemic has acted as an accelerant of the transition away from oil towards cleaner fuels.
“The impact of global efforts to decarbonize will play a major role in oil’s future, with international oil companies having to realign their strategies,” says Finley.
“Investing in carbon-free alternatives will see them facing new competitors, while also having to establish their credibility in new markets and situations.”
Oil major BP has already announced a major shift in its investment strategy, warning the pandemic could see oil demand peak in the early 2020s, around a decade earlier than last year’s prediction. The company plans to reduce oil production by 40% and boost renewable energy investments 10-fold by 2030, aiming for net-zero emissions by mid-century.
Reshaping the Future
As the BP example shows, strategies to mitigate the impact of switching to more sustainable production are already underway for many industry players, both in terms of adapting traditional business models and taking advantage of new opportunities.
As well as investing in renewables, adapting traditional oil & gas businesses to reduce their carbon impact will likely require substantial investments in alternative fuels like biofuels and hydrogen, technologies like carbon capture, utilization and storage (CCUS), and participation in various carbon offsetting schemes.
Governments and regulators have an important role to play in nudging policy and investment opportunities towards a green energy agenda, while exploiting the potential of the energy transition to combat climate change.
The pandemic has changed how investors perceive the risks associated with the oil & gas sector, and may reinforce a focus away from hydrocarbons toward renewable energies.
Similarly, political changes such as the U.S. presidential election will reshape the oil industry’s fortunes if new regulations are passed, adding even more uncertainty to the mix. What this will mean for future oil prices is anyone’s guess.
Johnny Wood has been a journalist for over 15 years working in different parts of the world – Asia, Europe, and the Middle East. As well as an accomplished features writer he has edited several prestigious lifestyle magazines and corporate publications.