It is with cautious optimism that we bid farewell to 2020.
Rising probability of a safe and effective vaccine becoming available has altered the outlook for the global economy and with that for oil demand.
Reflecting the slightly upbeat sentiment S&P Global Ratings in a report released in late November said that its forecasts have stabilized for the first time since the pandemic began and while considerable uncertainties remain, the risks to growth are more balanced as acute downside risks ease and upside risks emerge.
The ratings agency expects Asia-Pacific GDP to shrink by about 2% in 2020 and grow by close to 7% in 2021. However, for the region excluding China, activity is not expected to return to pre-COVID levels before the third quarter of 2021. Ratings and Platts are divisions of S&P Global.
As we look ahead at 2021, here are some of the key themes in the oil market to watch out for:
Post-COVID oil demand recovery
With the worst of the pandemic behind, S&P Global Platts Analytics has raised its 2021 oil demand growth outlook by half a million barrels per day to 6.3 million b/d, with Asia and particularly China and India leading the way. Oil demand in 2021 is now expected to come in at 99.53 million b/d.
It, however, cautioned that a combination of increasing COVID-19 infections and successful vaccines means global oil demand is likely to worsen in the short run but improve six months down the road.
Asian oil demand is expected to grow by 1.7 million b/d in 2021 and will be flat to marginally above 2019, or pre-pandemic levels, according to Platts Analytics. China and India will account for around 70% of this growth.
Rising transport demand, a pick-up in industrial activity and government stimulus programs are some the factors driving oil demand higher in the two countries.
"A bulk of the oil demand growth in China will still be from the transport sector—normalization and resumption of normal growth for road transportation, booming car sales and increasing private car driving," said Platts' head of global demand and Asia analytics, Kang Wu, adding that petrochemicals, industrial and shipping will also drive oil demand growth higher.
The key risks to China's oil demand recovery include a slowdown in stimulus programs, which S&P Global Ratings already sees happening. This is expected to slow the growth momentum slightly next year. And despite Beijing's strong policy focus this year of becoming self-reliant and more internally driven, the country remains exposed to the variances of the global economy.
India among the worst hit by COVID-19, but the situation has been improving with daily new cases declining and a continued easing of restrictions. The country's demand for gasoline and gasoil made a sharp U-turn ahead of the festive season in late October and drove refiners to crank up operating rates.
Though demand is expected to ease in Q1 2021 from the festive-driven Q4 2020, the overall outlook for next year is positive, according to JY Lim, oil market adviser for Platts Asia Analytics.
This is driven by increased mobility – mobility in November averaged 124% against pre-COVID levels and was trending even higher in early December; increased vehicle sales; and leading indicators such as manufacturing PMI holding above the 50 level over the past few months, an indication of expansion, Lim noted.
OPEC+ supply management
OPEC and Russia are expected to continue holding sway over the oil markets in 2021 as non-OPEC supply suffers from a fallout of the pandemic—US oil production, for example, is expected to fall to 10.24 million b/d in 2021 from 13 million b/d before the pandemic, according to Platts Analytics.
But markets should be prepared for more volatility next year after OPEC and its partners in the OPEC+ alliance agreed this month to set output levels on a monthly basis, instead of a typical quarterly or half-yearly basis, as they grapple with how much crude oil to release in an uncertain demand recovery scenario.
OPEC+ enacted a supply cut of 9.7 million b/d in May. This was eased to 7.7 million b/d in August, and will be eased further to 7.2 million b/d in January.
The group's balancing act has faced several challenges in 2020 including over production by key members Iraq, Nigeria and the UAE, and the return of Libyan oil to the markets toward the end of the year.
But this calculation will get more complicated next year with the possibility of Iranian oil returning to the market under US President-elect Joe Biden's administration, after President Donald Trump's "maximum pressure" campaign to curb the country's oil sales to zero.
Iranian President Hassan Rouhani, speaking to his cabinet earlier this month, said the oil ministry had been instructed to "take all necessary measures" to prepare the oil industry's resources and equipment to return to full capacity within three months. Iran's government is counting on selling 2.3 million b/d of combined crude oil and gas condensates in the country's next fiscal year, which starts March 20.
Changing refining landscape
An 8 million b/d collapse in oil demand in 2020 has hit refiners hard globally and Asia has not remained unscathed.
Oil refineries in the Philippines and the Oceania region have either already announced closures or are seriously considering it, leaving them exposed to imports to meet most of their oil demand needs. Shell recently announced that it would halve the capacity of its Pulao Bukom refinery in Singapore to lower its carbon intensity.
If all closures go through, as much as 950,000 b/d of capacity will be removed, opening up export opportunities for other refiners in the region, particularly the Chinese and South Korean refineries.
China is bucking the trend and by the end of next year, the country will have added over 1 million b/d of refining capacity.
China's share of CDU capacity in the region had increased by 9 percentage points from 2010 to 49% in 2019 and it is expected to rise to 50% in 2022, accounting for half of regional capacity, which highlights the rising influence of the nation as a refining center, according to Platts Analytics.
Chinese refiners will also be best placed to supply the emerging outlets of the Philippines and Australia given the flexibility of their plants and their ability so far to weather periods of prolonged weak regional margins, with a strong post-lockdown domestic demand helping to sustain refinery economics.
The pandemic has prompted a re-examination of the role of fossil fuels, including oil, and speeded up transition toward a low-carbon economy. China, Japan and South Korea, which together account for 20% of world oil demand, have all announced carbon neutrality goals.
Though gradual, the impact of this on oil demand and oil investments cannot be ignored.
Peak oil demand timelines have shifted. BP said in September the market may never recover to pre-pandemic levels of roughly 100 million b/d, and OPEC, in October, for the first time forecast the peak in global demand, estimating the world's thirst for oil will stop growing in about 20 years.
Oil demand is expected to face the biggest hit from clean transport policies and a growth in renewable energy. Though petrochemical demand and demand for long-distance transport fuels are expected to offset some of the demand destruction.
Global electric vehicle sales surged 80% year on year in September 2020 and China's Society of Automotive Engineers, an influential industrial trade group, announced mid-October that they expect EV sales in the country to jump to 20% of overall new car sales by 2025 and to 50% by 2035 from 5% currently.
While China makes giant strides in EVs, Japan and South Korea are leading the way in hydrogen.
South Korea has launched a new future car government division that would help develop electric vehicle and hydrogen car-related technologies and has set an ambitious target of having 1.13 million EVs and 200,000 hydrogen FCVs on its roads by 2025, a 9 and 20-fold jump respectively.
In Japan, a group of 88 companies spanning various industries have launched the Japan Hydrogen Association (JH2A) to develop a hydrogen supply chain and promote its greater use as a potential new source of energy by making it widely available at an affordable price.
But even as the global economy shifts towards a low-carbon one, the world is still going to need oil, and according to OPEC, to meet future demand upstream investment through 2045 will need to average $380 billion/year, or $9.9 trillion cumulatively.
But access to capital for fossil fuel producers is going to become hard as international banks including Morgan Stanley and HSBC to name a few have pledged to achieve net-zero emission goals in their lending portfolio.
It is this under-investment trend that has prompted global oil major ExxonMobil to keep betting on oil while its peers including Shell, BP and Total make a shift towards cleaner fuels.