It was the best of times, it was the worst of times, and it was the modest of times. A different take on Charles Dickens’ illustrious sentence would be most suitable to describe the state of energy markets in 2020. West Texas Intermediate (WTI) and Brent crude prices were on track to have another decent year, but then oil joined the broader market meltdown and cratered below zero for the first time on record. Contrary to what the naysayers expected, crude rebounded and surged 20% in the second half of 2020. Now that oil prices have stabilized, will they pop in 2021? The options market says yes, but some factors need to be examined before mortgaging the oilwell on your farm.
OPEC Is Oil You Need?
During the final meeting of 2020, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, OPEC+, agreed to raise output by half a million barrels per day, effective January. It was not big enough to spook markets, but it was more than enough to force analysts to pay attention. The November 30-December 3 powwow also resulted in the 13-nation cartel and its six allies agreeing to meet at the beginning of each month to modify any production volume adjustments for the following month.
Not too much is known ahead of the January 4 virtual get-together, and Saudi Arabia Energy Minister Crown Prince Abdulaziz bin Salman prefers it this way. He said in a statement that he wants to keep market speculators “on their toes.” But we did get a little bit of a hint as to what could be discussed.
Russian Deputy Prime Minister Alexander Novak told reporters in Moscow that the world’s third-largest oil producer will be advocating for a production hike since prices are trading in the $45-$55 range.
“To restore our output, that we’ve reduced a lot, the price range of $45 to $55 a barrel is the most optimal. If the situation is normal, stable, we will support the increase. We must reach levels that were envisaged earlier, from Jan. 1, gradually, without pulling the market too much,” he said.
Until the coronavirus global health pandemic subsides, it is safe to say crude investors will be on the edge of their seats and sipping on their cups of Texas Tea as they watch the OPEC monthly meetings.
Your Options in 2021
The options market has been crazy over the last 12 months as this segment of the financial colosseum has attracted a barrage of investors with a fierce appetite for risk. A consequence of near-zero interest rates and margin trading? The industry is sounding the alarm that it could be even wilder in 2021, with volatility going through the roof like Tesla’s share price. That said, the options market is signaling a few plays in 2021: the S&P 500, silver, and energy.
Options traders are indicating that the energy industry will be one of the hottest plays this year and that one of the biggest names in the sector, Exxon Mobil, will be at the head of the pack. Like its energy rivals, Exxon stock plummeted 41% in 2020, and observers are anticipating a dividend cut to weather the storm. The company also posted a $20 billion write-down. Still, the options market is calling for a 31% gain to a little more than $55 in 2021.
Drill, Baby, Drill?
In recent weeks, there has been a lot of news on the oil supply front. China is fueling South America’s crude oil boom. The increasing number of crude oil rigs in the U.S. suggests the domestic industry has been renewed. Russia’s annual output declined for the first time in a decade. Iran plans to double production levels next year. OPEC+’s output cut compliance was 100% in November.
But what should you anticipate regarding demand? It depends on whom you ask.
According to a Reuters poll of 39 economists and analysts, oil prices will unlikely stage a monumental recovery in 2021, citing a new COVID-19 variant and related travel restrictions. The International Energy Agency (IEA) predicted that demand would recover by 5.8 million barrels per day (bpd) to 97.1 million bpd, which is roughly three million barrels below pre-pandemic levels. The U.S. Energy Information Administration (EIA) shared this forecast, predicting that global crude consumption will recover by nearly six million bpd. OPEC slashed its first-quarter demand projection by one million bpd, estimating the demand will rise by only 500,000 bpd in the January-to-March period.
Crude Has Been Refined
No matter what happens, rumors of crude’s death have been greatly exaggerated. When U.S. crude prices plunged to -$40.32 per barrel, there was plenty of talk about the commodity’s impending doom. This, the doomers shrieked to the heavens, was another nail in the energy supply’s coffin. The world would now be transitioning to renewables, and if you took advantage of the record-low prices, you were a fool and a shill for Big Oil. Fast forward to the present, and prices have recovered, and the debate being had is if oil will hover around the $50 range or test a pre-coronavirus level of $65 in 2021. This is not a bad situation to be in in the middle of a pandemic!
Read more from Andrew Moran.