What Happened to Oil in 2020?
Updated: Dec 26, 2020
Source: Getty Images
2020 has been a turbulent year on many fronts with the outbreak of the COVID-19 pandemic, a historic US election and the ongoing Brexit saga. With so many major macroeconomic events the year was also a volatile one for oil. Predictions of a good year for oil prices were shattered by price wars, a global recession and enormous supply gluts that at one point drove prices negative - starting in January we recount the major events that affected oil prices this year.
The initial outlook for oil prices in 2020 was an optimistic one with an expectation of high prices driven by the continuation of an aggressive OPEC+ production cut strategy and a persistent strength in demand. Brent Crude started the year at $66 a barrel and traded at above the $60 mark for the majority of January. The other key benchmark price, West Texas Intermediate (WTI) started the year at $61 a barrel, and although WTI experienced a slow decline, the price remained above $50 throughout the month. In January news had broken about a new virus – ‘COVID-19’ spreading in China however concerns over this had been dismissed with the World Health Organization and the Chinese state claiming the virus “does not transmit readily between people”. With fear of the virus non-existent and analysts paying little attention to it the oil price remained strong in January. Oil prices continued in their steady decline in February although prices remained relatively stable as life went ahead as normal for the majority of the world. Brent Crude declined through the month although remained above the $50 level throughout and WTI stayed steady around $50 for the majority of the month before declining to $45 at the end of the month as fears of the virus increased.
The first big drop that oil prices experienced in 2020 was not induced directly by the virus but by the price war between Russia and Saudi Arabia which marked the end of their OPEC+ alliance. Following an OPEC meeting on the 5th March the cartel agreed to extensive production cuts in 2020 as a result of anticipated global demand falls resulting from the pandemic. However, Russia rejected the request to join this cut and prices of oil declined a substantial 10% on the breaking of this news. On the 8th March Saudi Arabia then opted to initiate a price war offering targeted discounts of $6-$8 a barrel to countries in Europe and Asia that were key markets for Russian oil. This move triggered further declines in oil with Brent Crude falling by 30% to hit $33 on the 9th March, and WTI falling 20% to $31 on the same day. The refusal to cut production continued throughout March and April and with the pandemic inducing lockdowns and restricting travel demand for oil fell concurrent to the supply glut that was forming. Eventually under heavy international pressure Saudi Arabia and Russia agreed to joint production cuts in mid-April, however by this point the combined effect of a dramatic reduction in global demand and a significant oversupply of oil meant that prices were already well below $30 a barrel with an abundance of cheap oil available.
In addition to the supply-side shock of the price war, the oil prices faced further downward pressure on the demand side. The COVID-19 Pandemic forced governments to institute shutdowns across large parts of the world, leading to a slowdown in economic activity. This meant that people were not driving or flying at the same rate as they would have in previous years. In fact, they were not doing much at all! As a result, the global need for fuel was greatly reduced. In April, US oil demand fell to levels not seen since 1990, a fall of over 30% over the previous year, while in the UK sales of gasoline fell by 66%. The International Energy Agency estimated that over this initial period of the pandemic that global oil demand fell by around 30 million barrels per day, down to 70 million. In fact, global demand is expected to drop by 9.3 million barrels per day, which is the highest fall of any recent recession. The combination of these supply and demand shocks caused Brent Crude pall below $20 per barrel in April.
In addition, shortages in oil storage capacity led to a strange phenomenon in global oil prices. In April 2020 WTI went negative, reaching lows of $-37. This occurred because oil is priced in terms of futures contracts. Those who hold the contract at its expiry must take physical delivery of the oil in Cushing, Oklahoma. Thus, on April 21st the contracts for Oil to be delivered in May were expiring, and a combination of weak demand and excess supply meant that there was a lack of oil storage capacity. This meant that there were very few buyers for oil, and traders who did not have the ability to take physical delivery of oil had to pay people to take the contracts off their hands, leading to negative oil prices.
However, despite significant downward movement in oil prices in the early parts of the year, prices have somewhat recovered in the period since. The easing of lockdowns across the world after the initial waves of the pandemic provided a boost to demand. Simultaneously, OPEC and other key oil producing nations agreed to cut supply by 9.7 million barrels per day from May onwards. The combination of lower supply and higher demand allowed Brent Crude prices to stabilise at around $42 per barrel. Then, in November following the announcements of highly effective vaccines from Pfizer and Moderna, oil prices surged as expectations of increased economic activity and demand were high. This has led oil to highs not seen since before the pandemic, with oil presently trading at around $50 per barrel.
Looking forward, we foresee further price growth in key oil price benchmarks. The International Energy Agency expects demand to pick up to around 97.1 million barrels per day. At the same time, supply is likely to see further constrictions, as US oil output will fall by 1.2 million barrels per day compared to pre-COVID levels, while OPEC production will see a slight pickup, but will still be 1.1 million barrels per day below pre-COVID levels. Thus, increasing demand and lower supply are likely to fuel further price climbs. However, the long term move towards sustainability and green energy production has been accelerated by the events of 2020, meaning that oil’s best days are probably behind it.