December 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $6.09 (+14.9%), to $47.03 per barrel in December. That increase occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 317,000 barrel-per-day (b/d) increase in the amount of petroleum products demanded/supplied during October (to 18.6 million b/d, on par with volumes during/after the Great Recession), and little change in accumulated oil stocks (December average: 499 million barrels).

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From the 4 January 2021 issue of The Energy Bulletin:

Prognosis: Average oil demand will probably rise by the most on record in 2021. The International Energy Agency projects consumption will increase by almost 6 million b/d this year but will average just 96.9 million b/d -- still well below the pre-pandemic record of 100 million in 2019. Oil demand was also forecast initially to expand by about 1 million b/d in 2020 and 2021. That means consumption in 2021 should be at least 5 million b/d below where it would have been without the coronavirus.

The sector with significantly lower demand this year will likely be jet fuel, with airlines consuming 2.5 million b/d less than before the pandemic. According to the IEA, gasoline and diesel demand are expected to be restricted in the first half of the year until vaccines are more widely available and will only reach 97-99 percent of pre-pandemic levels. A drop in economic output will also hurt demand with reduced manufacturing and fewer goods shipped by sea.

The outlook for oil supply is more complicated. Investment in the industry has been falling, and the pandemic has delayed drilling programs. U.S. shale, which transformed the oil and gas industry for much of the past five years, is in trouble. According to the EIA, this relatively expensive source of supply has been hard hit by the crash in prices, with U.S. crude output falling from a record 12.3 million b/d in 2019 to 11.3 million in 2020. Shale oil production stabilized in the second half of 2020, but the days of rapid growth are behind it for now. The EIA sees U.S. supply slipping to 11.1m b/d in 2021.

One of the critical variables for oil will be how shale and other producers respond if prices rise much above $50 a barrel - a level where most companies can cover their costs. Globally, the IEA sees non-OPEC growing by 500,000 b/d this year after falling 2.6 million b/d in 2020.

The supply surplus that developed due to the pandemic puts a lot of weight on what OPEC+ will do. The alliance called off a month-long price war in April and agreed to cut almost 10 percent of global oil production to rescue the market. The deal was meant to taper, allowing countries to produce more as demand recovers. But a drawn-out crisis has left them stuck with more than 7 million b/d of crude still offline. They are expected to meet again on Jan. 4th to discuss adding back 500,000 b/d.

The most significant geopolitical shift in 2021 will probably be the election of Joe Biden as U.S. president. President Trump became heavily involved with OPEC decisions, pressuring Saudi Arabia to raise or lower production in return for his support. President-elect Joe Biden is expected to be less hands-on with the cartel, but he may end up being no less influential. The potential revival of the Iran nuclear deal could result in Tehran adding close to 2 million b/d of crude back to the market if U.S. sanctions ease.

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Selected highlights from the 5 January 2021 issue of OilPrice.com’s Intelligence Report include:

OPEC+ leans towards no change. Oil prices rallied on Tuesday morning, following reports that Russia -- the OPEC+ producer that was insisting on a 500,000-bpd production increase in February -- has agreed that there would not be another rise in the pact's production next month.

U.S. shale could recover. EIA estimates point to U.S. oil production staying at around 11 million bpd for at least another year, as production rates from existing wells in the U.S. shale patch will fall faster than production gains from fewer newly drilled wells. But some analysts say that the market has been too quick to write off U.S. shale again, and will be surprised by the rebound in American oil production in 2021.

Permian showing signs of life. On the ground in the Permian basin, there are visible signs of an uptick in activity. More traffic, higher production, and better-than-expected revenues for the New Mexico state government. New Mexico's oil production increased by 5.5% in the third quarter.

Dallas Fed: Shale returning. The quarterly Dallas Fed survey showed a positive reading for its oil and gas index, the first positive reading since the first quarter of 2019. Multiple readings in the survey -- capex, drilling activity, employment, oilfield services activity -- showed improvement.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.