An Introduction – Crude Oil Price in 2021
The oil and gas industry is in the midst of its third price crash in the last 12 years. The industry recovered after the first two shocks, and business as usual resumed. This time, however, things are different. Poor returns have been attributed to the introduction of shale, excess supply, and liberal financial markets that overlooked the lack of capital discipline. With prices nearing 30-year lows and societal pressure increasing, leaders recognise that change is unavoidable.The pandemic crisis hastens what was already shaping up to be one of the most pivotal periods in the industry’s history.
While the extent and duration of this crisis are unknown, it will be difficult to return to the attractive industry performance that has previously prevailed without major change. Crude oil trading, on the other hand, will continue to be a multi-trillion-dollar sector for decades in most scenarios. It is far too crucial to fail, given its role in producing affordable electricity.
To shift the present paradigm, the industry will have to dig deep and draw on its proud history of significant structural changes, innovation, and safe and profitable operations in the most difficult of circumstances. Those that take advantage of the crisis to reposition their portfolios and change their business strategies will emerge victorious. Companies that do not comply will be forced to restructure or will eventually go out of business.
A Faltering in Crude Oil Trading Is About To Enter
Long megacycles of fluctuating supply and demand drive the sector, with shocks thrown in for good measure. The generation of value has swung dramatically during these megacycles. Demand for oil and gas increased, while OPEC helped keep prices stable. Opportunities arose as a result of political shifts and new technologies.
The industry’s “cost curves,” which rated its production assets from lowest to highest cost, were extremely steep. The market-clearing price increased as a result of the high-cost production required to meet demand. The same could be said for gas and LNG, which were frequently related to oil prices. A steep cost curve of the world’s refining capacity sustained substantial margins even downstream.
Companies invested extensively, buoyed by this highly favourable industrial structure and aided by an easy supply of money seeking returns as interest rates fell. The rush to get more barrels onstream faster from more complicated resources produced considerable cost escalation, especially in engineering and construction. These investments resulted in large proven reserves, allowing the world’s supply to shift from slightly short to long.
Short-Term Supply, Demand, And Price Situations
Demand for refined crude oil products has dropped by at least 20%, putting refining in jeopardy. Many believe it will take at least two years for demand to recover, with the forecast for jet fuel being especially dismal.
Companies must find out how to operate securely as the illness spreads, as well as how to deal with full storage, pricing falling below cash expenses for certain operators, and capital markets closing for all but the largest participants.
Looking beyond today’s crises into the late 2030s, the macro-environment is expected to deteriorate much further. To begin, consider supply and demand. Demand for hydrocarbons, notably oil, is expected to peak in the 2030s before gradually declining. Marginal pricing and, in some cases outside the rising non-OECD demand areas, the economics of some refiners seeking to avoid the expensive cost of retiring assets may disclose excess capacity in refining, putting downward pressure on profits.
The cost curve in the upstream will most likely remain flat. While geopolitical threats will continue to influence supply, new low-cost, short-cycle supply sources will lessen the amplitude and length of price spikes. Despite being pummelling, the shale oil and gas sub sector will continue to deliver production that can be brought online quickly. Its resiliency may even improve when the sector is consolidated by larger, more powerful firms. The mission of OPEC and OPEC++ will be made more difficult rather than easier as demand declines due to the energy transition and global oversupply.
Global gas and LNG will play an important part in the energy transition, securing a place in the future energy mix, which will be bolstered by continued demand growth over the next decade. The projected and prospective cyclical capacity development in LNG, on the other hand, will put pressure on global LNG contract pricing, and thus regional gas prices, during the next decade. Gas will confront the same challenges as oil in the long run (beyond 2035), with peak demand and incremental economics driving decision-making.
A rising number of investors are doubtful that today’s oil and gas companies will ever deliver satisfactory profits. In addition, their significance in the energy transition is unclear. Oil and gas businesses will have to demonstrate that they are capable of mastering this market. Finance, capital allocation, risk management, and governance will all require discipline.
In A Nutshell – Crude Oil Trading
During times of crisis, new enterprises related to the energy transition and renewables will continue to develop. Some of these opportunities offer uncertain returns in crude oil trading, and the oil and gas industry will have to establish that it can be a natural and leading player in these industries. The oil and gas business may be interested in hydrogen, ammonia, methanol, novel polymers, and carbon capture, utilisation, and storage.
The current crisis will have a long-term and short-term impact on the sector.