It may be the understatement of the early decade, but 2020 was an epic year for the crude oil and energy markets. A U.S. presidential election, the COVID-19 pandemic, and a hot Russia-Saudi Arabia price war headlined what was one of the most tumultuous years in recent history.
So what’s next for the global energy complex? Let’s take a look at the key market drivers and what late 2020 and 2021 may have in store for crude oil.
COVID-19 Poses Serious Demand-Side Questions
The onset of the coronavirus (COVID-19) pandemic in late February essentially destroyed the demand for crude oil worldwide. Lockdowns, quarantines, and travel restrictions crushed the need for refined fuels as industrial and leisure consumption went offline.
When it comes to the crude oil and energy markets, the relationship between supply and demand is the ultimate market driver. This concept was proven definitively during the supply glut of April 2020 and the subsequent plunge of May West Texas Intermediate (WTI) futures to -$37.63 per barrel. However, demand recovered during the summer months, and WTI eclipsed the $40.00 level.
As of this writing, economies around the world have largely reopened. However, the threat of a second or third wave of COVID-19 hampering energy demand remains very real. The early October 2020 lockdowns in Madrid, Spain, indicate that many countries will not hesitate to reimpose mass quarantines to stymie the contagion’s spread.
If we see more spring 2020-type COVID-19 restrictions being put into place for 2021, then demand is certain to suffer. Large-scale actions of this nature are sure to drive oil prices down significantly.
On the flip side of the supply-demand equation, production and price-setting from OPEC+ nations are key factors influencing oil market stability. OPEC+ was active during the first half of 2020, with price cuts and increased production driving oil prices south.
In reality, it’s always difficult to predict OPEC+ policies ahead of time. However, as 2020 went on, OPEC+ nations became inclined to reduce output in response to decreased COVID-19 demand. A series of production cuts were instituted during the late summer, with further cuts planned into the fall and early winter.
OPEC+’s primary concern for 2021 is the recovery of global demand to pre-COVID-19 levels. According to analysts from Citigroup, OPEC members, and potentially other producers, may cut output significantly and establish a pricing floor at the $30.00 level for 2021. If correct, these actions may limit the downside potential of WTI and North Sea Brent (Brent) crude oil.
Election 2020: Political Uncertainty
Daniels Trading is nonpartisan and does not endorse political candidates. The purpose of this blog post is to provide objective, unbiased information on what we believe could happen in the markets depending on the outcome of the election or how the election may impact the markets. The content is not intended to convey a preference or state a position in support of any candidate, and the sentiments expressed do not necessarily reflect the viewpoints of our team members.
One of the key underpinnings of global oil is politics. And the 2020 election season brought an abundance of uncertainty to the crude oil and energy markets. The winner of the 2020 general election―whether it’s the incumbent, Donald Trump, or challenger Joe Biden―is poised to dramatically impact both the supply and demand sides of North American energy.
Throughout Trump’s first-term, oil-friendly policies have been the norm. Extensive fracking and logistical deregulation have boosted U.S. output and, in turn, supplies. Conversely, Joe Biden has built a campaign platform on stemming the tides of climate change by adopting a carbon-zero economy by 2050. One of the key tenets is to eliminate all fracking on federal lands and heavily restrict the issuance of new permits.
The 2020 election will be an important market driver for the crude oil and energy markets throughout 2021. In the case of a Trump victory, supporting North American fracking will be a point of emphasis.
Trump’s energy-friendly policies are designed to enhance production, thus keeping crude oil prices in check. However, should Biden assume the presidency, production from fracking will be limited. Given this scenario, crude oil prices are likely to rise.
Trading the Crude Oil and Energy Markets in 2021
The world’s crude oil and energy markets have been in a state of flux throughout 2020. Will 2021 be any different? In all likelihood, no. Periodic volatility will be the rule as pandemic concerns, OPEC+ policy, and governmental intervention draw participation in the marketplace. The result will be either bullish or bearish energy prices as supply and demand respond to these market influencers and other stimuli.
To learn more about the crude oil and energy trade, check out Daniels Trading’s e-book Introduction to Crude Oil Futures. In it, you’ll find everything you need to hit the ground running in the global energy marketplace.