An uneasy start to a crude 2021

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2021 has begun. A disruptive, tumultuous, 2020 has come to an end. How would ‘crude’ markets behave in the new year remains a moot question?

Looking into the new year, one could see a number of variables in play.

The Covid-19 pandemic had triggered demand destruction, with some insisting that the global oil demand may have already peaked. Crude markets hence slipped, losing more than a fifth of their value in volatile trade in 2020. Lifestyles changed, apparently forever. ‘Work from home’ became the new normal, commuting to the workplace became extinct as lockdowns to combat the pandemic, depressing the overall economic activity. All this resulted in a demand drop — apparently for long.

The impact of the pandemic would continue to influence global crude demand in 2021 too. The key downside risk for the crude world in the new year would be the mutating strains of the coronavirus, threatening demand recovery, 39 energy experts polled by Reuters said last week.

The new Covid-19 strain and the soaring cases across the United Kingdom as well as other parts of Europe, the United States, Canada, and even in Pakistan are likely to cap oil price gains in the early months of 2021, most now believe.

This was a crushing blow to the positive sentiments that were generated on the news of the rollout of the vaccines. However, even if the vaccine remains effective against the new mutants too, to be fair, it is a fairly long shot. In fact, it may not be until the end of the year, when everyone desirous to get vaccinated, is able to get a shot. And global economic activity may not revive until everyone is vaccinated.

Climate change is another major factor swaying over the global crude scene. The energy transition to a low-carbon future has contributed to the predictions that peak oil demand has arrived.

The incoming change in White House also carries a significant impact on the climate change movement. In sharp contrast to the Trump administration’s views on climate change, the appointment of US Secretary John Kerry as the presidential envoy for the climate in the incoming administration, underscores Joe Biden’s commitment to tackling the global climate crisis.

It is apparent that the new administration would be encouraging green electricity systems and electric vehicles — at the expense of fossil fuels. The US shale output could be hit. Biden has already indicated that he would curtail drilling on federal land, responsible for some 22 per cent of US oil production and 13pc of natural gas production.

Electric vehicles (EVs) are also a crucial part of the Biden plan. 500,000 charging stations in the US were part of Biden’s platform. In order to overcome one of the biggest hurdles facing EVs: the fear of the would-be drivers, that they will not have enough places to charge up, such a number of charging stations are absolutely required. Yet, Biden needs the support of Congress to overcome this challenge. If he succeeds, this could spark the sale of some 25 million electric cars and trucks, according to forecasts by BloombergNEF. And this would adversely impact fossil fuel ­consumption.

Another big if, in the entire equation, is the possible restoration of the Iran nuclear deal. This could result in more Iranian oil coming to the market, carrying an adverse impact on the global crude balance and enhancing the pressure on the Organisation of the Petroleum Exporting Countries and allies (Opec+). They would need to cut output further, at a time, when some in the group are already clamouring to lessen the constraint on their output.

Already fissures within the group on the issue are visible. Russia plans to support a further gradual increase in Opec+ production at the next meeting this month.

“To restore our output, that we’ve reduced a lot, the price range of $45 to $55 a barrel is the most optimal,” Deputy Russian Prime Minister Alexander Novak told reporters in Moscow. “Otherwise, we’ll never restore production, others will restore it.”

On the other hand, others, including Abdelmadjid Attar, the Algerian energy minister, and the current Opec president, is of the view that the Opec+ should remain cautious at its upcoming meeting. The new strain of the coronavirus is likely to weigh on global oil demand, Attar told daily El-Watan.

The Opec+ Joint Ministerial Monitoring Committee (JMMC), co-chaired by Saudi Arabia and Russia will be meeting Monday, to track compliance with quotas and advise on policy. Opec+ ministers will also meet virtually after the meeting, to decide on output volumes for February. No an easy time for oil producers — yet.