The Oil Industry That Endured Its Worst Times, Can It Recover Next Year?

Crude Oil Demand to Recover Compared to This Year but Still Fall Short of 2019 Levels
OPEC+, Shale Industry and Other Supply-Side Risks Increase

[Asia Economy Reporter Naju-seok] The oil industry, which experienced its worst crisis ever, including recording negative prices for the first time in history, is expected to face another challenging year next year. Although the worst demand crisis has been avoided, the market may still fluctuate due to supply adjustment issues among oil-producing countries.

On the 29th (local time), international oil prices, which had sharply declined compared to the beginning of the year due to the shock of the COVID-19 pandemic, showed signs of recovery. On that day, West Texas Intermediate (WTI) crude oil for February delivery closed at $48.00 per barrel, up 0.79% ($0.38). Although this is still below the early-year level when prices exceeded $60 per barrel, it appears that the bottom has been reached.

Among experts, opinions are divided regarding next year’s oil price trends. Some predict that oil prices will rise as a full-scale recovery begins, while others foresee an oil peak from the demand side, indicating that crude oil demand will not return to previous levels.

For now, related organizations such as the International Energy Agency (IEA) expect oil demand to increase next year compared to this year. The IEA forecasts daily crude oil demand to reach 96.9 million barrels next year. This represents an increase of nearly 6 million barrels compared to this year, but it still falls short of the 100 million barrels per day recorded last year.

[Image source=Yonhap News]

The reason demand has not returned to its proper trajectory is primarily due to a reduction in the number of flights, which has decreased jet fuel demand. For gasoline and diesel, vehicle movement has also declined, preventing a return to pre-COVID-19 levels. Additionally, a reduction in overall manufacturing demand has led to fewer maritime logistics shipments, which is cited as another factor slowing recovery.

There is also an observation that supply may become a more significant variable than demand. Due to the sharp drop in oil demand this year, oil companies reduced capital investments. In particular, investments in shale, which has high extraction costs, were drastically cut. As a result, U.S. crude oil production, which was 12.3 million barrels per day in 2019, dropped to 11.3 million barrels this year. The U.S. Energy Information Administration predicts that U.S. crude oil production will further decline to 11.1 million barrels next year. However, there is also speculation that if oil prices rise, production could increase again.

Moreover, whether OPEC+ (the Organization of the Petroleum Exporting Countries (OPEC) member countries and non-OPEC allies) can cohesively manage supply next year is a key factor determining oil supply. OPEC+, which undertook the largest-ever crude oil production cuts, agreed to gradually restore production, but there are disagreements over the pace. At the meeting scheduled for the 4th of next month, discussions will focus on reducing the scale of cuts and increasing production.

Those advocating for the necessity of production cuts emphasize lockdown measures due to COVID-19, while those supporting gradual increases prioritize market recovery. The biggest variable for next year’s oil prices is whether OPEC+ can continuously control demand, reflecting these internal disagreements within OPEC+.

OPEC+ was able to overcome market turmoil this year, including engaging in an oil war with increased production amid the worst demand crisis, largely due to the intervention of then-U.S. President Donald Trump. However, the problem now is that with Trump’s departure, it is uncertain whether his successor, President Joe Biden, will actively involve himself in issues such as crude oil production levels. Furthermore, the Biden administration is reportedly seeking to revive the Iran nuclear deal (JCPOA - Joint Comprehensive Plan of Action), which could lead to a surge of Iranian crude oil flooding the international market, increasing geopolitical variables next year.

This content was produced with the assistance of AI translation services.