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Oil prices could see choppy recovery through 2021 as world wrestles pandemic

After crumbling to historic lows in early 2020, crude oil prices should continue to recover at a choppy pace, returning to pre-pandemic levels by the end of 2021, analysts said.

"The pace of commodity end-market recovery remains tightly intertwined with restrictive measures in response to second-wave COVID impacts, the progress of COVID vaccine distribution, and additional stimulus legislation in the interim," Morgan Stanley analysts said in a Dec. 11 note.

As the COVID-19 vaccines began to roll out in Europe and the U.S., and the U.S. Congress agreed to more COVID-19 stimulus relief, West Texas Intermediate crude oil prices settled Dec. 21 at $47.74 per barrel, and Brent crude closed at $50.91/b, each declining more than 2% on the day.

WTI and Brent crude oil prices have been marching higher since hitting lows of negative $37.63/b and $19.33/b, respectively, in April. But the recovery may be a bit premature, UBS analyst Giovanni Staunovo said. "We think the positive risk sentiment following the recent vaccine news has triggered an overshooting in [the] oil price," he said.

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"Under normal circumstances, you would be tempted to think that oil could make further ground in 2021," AJ Bell analyst Russ Mould said in a Dec. 18 email.

However, a more robust recovery requires higher oil demand, and demand recovery will remain bumpy, Staunovo said in a Dec. 17 note. "We believe a material increase in oil demand is unlikely to happen before [the second quarter of 2021] when we expect vaccines to become widely available."

To complicate matters, a new, faster-spreading virus has raised concerns that tighter restrictions will impact the oil demand recovery.

Tudor Pickering Holt & Co. analysts also see demand as a linchpin for higher prices. "Our base case envisions $60/[b] Brent and $57.50/[b] WTI in [the second half of 2021], with inventory draws across the board as demand normalizes in the [Organisation for Economic Co-operation and Development] and continues to grow in the non-OECD," the analysts said Dec. 1, adding that Brent could overshoot to the upside toward $65/b.

Demand forecasts support the outlook for the delayed price recovery, as the International Energy Agency in its Dec. 15 Monthly Oil Market Report, modestly cut its oil demand estimates for 2020 and 2021.

Despite the recent rally in crude futures, amid uncertainty over the efficacy, availability and deployment of COVID-19 vaccines, the IEA said oil demand will plunge by 8.8 million b/d in 2020, a cut of 50,000 b/d from its previous forecast. The agency said demand will grow by 5.7 million b/d in 2021 to average 97.1 million b/d, but that marked a downward revision of 170,000 b/d from its previous forecast.

Price gains also hang on OPEC's intervention to cool the market ahead of the roll off of OPEC production cuts, Tudor Pickering Holt said. OPEC, at its Dec. 3 meeting, agreed to extend production cuts into 2021.

Following a week of discussions, OPEC and its allies, including Russia, decided to raise their aggregate crude oil production by 500,000 b/d in January 2021 and meet monthly to decide subsequent output levels. The group will meet again Jan. 4.

At the same time, U.S. shale oil production continues to decline. The latest "Drilling Productivity Report" from the U.S. Energy Information Administration showed U.S. unconventional oil output averaged 7.70 million barrels per day in November and is expected to decline to 7.58 million b/d in December and 7.44 million b/d in January 2021.

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"Hopefully the global economy will start to gain some real traction as the virus is contained and beaten off, driving demand higher at a time when OPEC is still exercising some supply discipline, oil majors are retrenching, and U.S. shale producers are under duress and cutting output. Given this scenario, it is not hard to create a rosy outlook," Mould said.

"However, the number of ifs, buts and maybes is considerable," he added. "There is no guarantee the vaccine will permit a speedy return to something like economic normality, and even if it does, then OPEC's supply discipline could quickly break down."

Phil Flynn, an analyst with The PRICE Futures Group, said the oil market has the makings of a semi supercycle — an extended period of historically high global growth.

"Massive cuts in spending would suggest that oil producers will not be able to meet demand once the world reclaims 100 million barrels of demand per day," Flynn said Dec. 22.