Can Oil Inventories Rebound in 2021

There’s no way to sugarcoat things; 2020 has been a catastrophic year for the oil market. Crude oil prices are on track to fall more than 20% on the year, although that doesn’t even begin to tell the story given that oil prices have crashed into negative territory at some time of the year. Given all the turmoil in the oil market, it’s no surprise that oil stocks struggled, with the average in the S&P Oil & Gas E&P ETF lose nearly 40% of its value.

However, we will soon turn the page on a year that many are eager to forget. With each new year bringing a fresh dose of optimism, here’s a look at oil stocks‘ ability to bounce back from their tough time in 2021.

Image source: Getty Images.

Resumption of demand to come

The biggest drag on the oil market in 2020 has been demand, which has fallen off a cliff due to the COVID-19 outbreak. According to the US Energy Information Administration (EIA), the global economy is on track to consume an average of 92.4 million barrels per day (BPD) of oil and other liquid fuels this year. This is a significant drop from its average of over 100 million BPD in 2018 and 2019.

The outlook for 2021 is a bit brighter. The EIA sees global fuel demand recovering to an average of nearly 98.2 million barrels per day in 2021. Meanwhile, the International Energy Agency (IEA) forecasts that oil consumption will be an average of about 96.9 million barrels per day. This represents an increase of 5.7 million BPD compared to the 2020 average, or about two-thirds of lost demand. Additionally, he sees robust demand for gasoline and diesel, which he predicts will return to around 99% of pre-COVID levels.

However, while consumption is on track to regain near pre-COVID levels, there is a massive amount of excess supply in oil storage tanks around the world. According to the IEA, there are about 625 million barrels more crude oil in storage than before the pandemic. It could take the economy a year to burn through all that excess inventory, given IEA demand projections and production estimates for OPEC and other producers.

This excess supply will likely maintain a ceiling on oil prices in 2021. In the view of the EIA, the global benchmark price, Brent, will average around $49 per barrel next year, which is not much higher than its expected average of $43 a barrel for the current quarter. He sees oil starting the year around $47 and ending up averaging around $50 by the fourth quarter of 2021.

What this means for oil stocks

Neither forecast is too bullish for oil stocks. While demand is expected to recover strongly, the current supply glut will absorb much of this additional consumption. On top of that, there are supply and demand risks. On the consumer side, the deployment of vaccines around the world could take longer due to potential production issues, adverse side effects, trial failures and resistance, which could impact the economic recovery and weigh on demand. Meanwhile, OPEC could bring production back too soon, which would keep inventory levels high, weighing on oil prices.

Given all this uncertainty, oil companies are taking an extremely cautious approach for 2021. Oil giants like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) have already pledged to cut spending over the coming year. Exxon plans to invest $16 billion to $19 billion in capital projects in 2021. That’s down from its 2020 budget of $23 billion, or $10 billion less than its original spending plan. . Meanwhile, Chevron only plans to invest about $14 billion next year. That’s below the $16 billion he planned to spend this year, which doesn’t include the capital outlay of Noble Energy he acquired in 2020.

In addition to cutting capital expenditure, most oil companies are focused on cutting costs in 2021 by increasing their size through mergers. Chevron launched the current melt wave by acquiring Noble for $13 billion in July, driven in part by the anticipation that it can achieve $300 million in cost savings. Other Notable Offers Included ConocoPhillips’ (NYSE:COP) A $9.7 billion reconciliation with Concho Resources (NYSE: CXO) and Pioneer of natural resources’ (NYSE:PXD) $7.6 billion purchase of Parsley Energy (NYSE:PE). Further deals are likely in 2021 as the industry consolidates to survive volatile oil prices and the continued threat of renewable energy.

On a more positive note, these cost-cutting measures could pay big dividends in 2021. If oil prices improve to around $50 a barrel and these oil companies meet their cost-cutting targets, they could generate a source of excess liquidity in the years to come. year. This could give them the funds to pay off their debt and buy back their downed stocks.

2021 could be a turbulent year for oil stocks

Oil consumption is expected to recover most of what it lost this year, which, with OPEC’s help to maintain supplies, should allow the oil industry to burn off its current glut of oil. by the end of 2021. This should ease some of the pressure on oil prices. . Add that to industry-wide cost-cutting initiatives, and oil stocks could rebound this year.

However, the navigation will probably not be smooth. The sector could face renewed selling pressure if vaccines do not roll out quickly enough or if supplies increase faster than expected. Investors should buckle up for what could be a bumpy ride.

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Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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Felix J. Dixon