Oil Price Forecast 2020-2050
How the COVID-19 Pandemic Will Affect Oil Prices in 2020 and 2021
Worldwide crude oil prices will average $41 a barrel for the second half of 2020 and $50/b in 2021. That is according to the Short-term Energy Outlook by the U.S. Energy Information Administration (EIA).
Oil prices started strong at $61/b in January 2020. Prices plummeted in the second quarter, with one day in April even closing at negative $37/b. They averaged $40/b in June.
The COVID-19 pandemic has drastically reduced global oil demand. Beginning in January 2020, many governments restricted travel and closed businesses to stem the outbreak.
A drop in demand from the pandemic was worsened by a supply glut. OPEC and its members had been abiding by an agreement to limit production until March 31, 2020. At the March 6, 2020, OPEC meeting, Russia announced it would no longer restrict production as of April 1. In response, OPEC announced it would also increase production.
As storage facilities filled, prices plummeted into negative territory. No one wanted delivery of oil, since there was hardly any place to store it. On April 20, 2020, the prices for a barrel of oil fell to -$37.63. On April 12, 2020, OPEC and Russia agreed to lower output to support prices. That sent prices back into the positive range.
- Oil prices started strong at $61/b in January 2020.
- Prices plummeted in the second quarter, with one day in April even closing at negative $37/b.
- Demand for oil has dropped because of the coronavirus pandemic.
- The EIA forecast that oil prices will average $41/b in the second half of 2020 and $50/b in 2021.
Brent Versus WTI
There are two grades of crude oil that are benchmarks for other oil prices. These are the West Texas Intermediate and Brent North Sea.
West Texas Intermediate comes from the United States and is the benchmark for U.S. oil prices. Brent North Sea oil comes from Northwest Europe and is the benchmark for global oil prices.
The EIA forecasts that WTI will average $37.55/b in 2020 and $45.70/b in 2021. That makes the Brent-WTI spread $2.95/b in 2020. The price of a barrel of WTI oil will be that much lower than Brent prices due to U.S. oversupply.
In Dec. 2015, the spread was just $2.00/b. That was right after Congress removed the 40-year ban on U.S. oil exports.
Four Reasons for Today’s Volatile Oil Prices
Oil prices used to have a predictable seasonal swing. They spiked in the spring, as oil traders anticipated high demand for summer vacation driving. Once demand peaked, prices dropped in the fall and winter.
Oil prices have become volatile thanks to unexpected swings in the factors affecting oil prices. The coronavirus pandemic has sent demand for oil plummeting. That has offset the three other factors affecting oil prices: rising U.S. oil production, the diminished clout of OPEC, and the strengthening dollar.
1. Slowing Global Demand
The EIA estimates U.S. oil demand will be 18.3 million b/d in 2019. That's 2.1 million b/d lower than in 2019. It expects demand to increase to 19.9 million b/d in 2021.
This forecast could be revised downward if the pandemic reduces demand throughout the summer driving season.
2. Rising U.S. Oil Production
U.S. producers of shale oil and alternative fuels, such as ethanol, increased supply. They increased supply slowly, supporting prices high enough to pay for exploration costs. Many shale oil producers became more efficient at extracting oil. They found ways to keep wells open, saving them the cost of capping them. This ramp-up began in 2015 and has affected supply ever since.
In August 2018, the United States became the world’s largest oil producer. In September 2019, U.S. oil production increased to an (at that time) record 12.1 million barrels a day. It was the first time since 1973 that the United States exported more oil than it imported. Production has fallen to 11.6 million b/d in 2020.
3. Diminished OPEC Clout
U.S. shale producers have become more influential, but they don’t operate as a cartel as OPEC does. To maintain market share, OPEC has not cut output enough to put a floor under prices.
OPEC’s leader, Saudi Arabia, wants higher oil prices because that’s the source of its government revenue. But it must balance that with losing market share to U.S. and Russian companies.
The conflict between the Sunni and Shiite branches of Islam has also compromised OPEC's power.
Sunni-led Saudi Arabia also doesn’t want to lose market share to its arch-rival, Shiite-led Iran. The 2015 nuclear peace treaty lifted 2010 economic sanctions and allowed Saudi Arabia's biggest rival to export oil again in 2016. But that source dried up when President Donald Trump reimposed sanctions in 2018.
4. Rising Dollar Value
Foreign exchange traders have been driving up the value of the dollar since 2014.
Many traders use the dollar as a safe have investment during times of economic uncertainty.
For example, the dollar’s value rose by 25% between 2013 and 2016 in response to the Greek debt crisis and Brexit. In the 10 days between March 3 and March 23, it rose 8.5% in response to the coronavirus pandemic.
All oil transactions are paid in U.S. dollars. Most oil-exporting countries peg their currencies to the dollar. As a result, a 25% rise in the dollar offsets a 25% drop in oil prices. Global economic uncertainty keeps the U.S. dollar strong.
Oil Price Forecast 2025 and 2050
The EIA predicted that, by 2025, a barrel of Brent crude oil's average price will rise to $79/b. This figure is in 2019 dollars, which removes the effect of inflation.
This long-term annual forecast was done early in the coronavirus pandemic.
By 2030, world demand will drive oil prices to $98/b. By 2040, prices will be $146/b, again quoted in 2019 dollars. By then, the cheap oil sources will have been exhausted, making it more expensive to extract oil. By 2050, oil prices will be $214/b, according to Table 1 of the EIA's Annual Energy Outlook.
The EIA assumes that demand for petroleum flattens out as utilities rely more on natural gas and renewable energy. It also assumes the economy grows around 2% annually on average, while energy consumption increases by 0.4% a year. The EIA also has predictions for other possible scenarios.
Oil at $200 a Barrel?
Although it seems ludicrous now, there are situations that could create oil at $200 a barrel. The EIA forecast oil prices of $214/ b in 2050 if the cost to produce oil drops and it crowds out competing energy sources.
In 2008, oil prices reached a record high of $127/b. They dropped to $36.84/b before rising to $104.06/b in 2013. That's when the Organization for Economic Cooperation and Development forecast that the price of Brent oil could go as high as $270/b. It based its prediction on skyrocketing demand from China and other emerging markets.
Would $200/b of oil be such a bad thing? Using oil as an energy source has caused climate change.
The OECD said that high oil prices result in "demand destruction." If high prices last long enough, people change their buying habits. Demand destruction occurred after the 1979 oil shock. Oil prices steadily deteriorated for about six years. They finally collapsed when demand declined, and supply caught up.
The idea of oil at $200/b seems catastrophic to the American way of life. But people in the European Union were paying the equivalent of about $250/b for years due to high taxes. That didn't stop the EU from being one of the world's largest oil consumers. As long as people have time to adjust, they will find ways to live with higher oil prices.
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