Can oil stocks rebound in 2021

There is no way to coat things; 2020 has been a terrible year for the oil market. Crude oil prices are set to drop by more than 20% on the year, although that isn’t even starting to tell the story given that oil prices have collapsed into negative territory at some time of the year. Given all the turmoil in the oil market, it is no surprise that oil stocks struggled, with the average in the S&P Oil & Gas E&P ETF losing almost 40% of its value.

However, we will soon be turning the page on a year that many can’t wait to forget. With each new year bringing a new dose of optimism, here’s a look at the possibility for oil stocks to rebound from their tough times in 2021.

Image source: Getty Images.

Resumption of upcoming demand

The biggest weight on the oil market in 2020 was demand, which fell 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 better. The EIA predicts a recovery in global fuel demand to nearly 98.2 million barrels per day in 2021. Meanwhile, the International Energy Agency (IEA) predicts that oil consumption will average of about 96.9 million barrels per day. This represents an increase of BPD 5.7 million from the 2020 average, or about two-thirds of the lost demand. Additionally, he’s seeing strong demand for gasoline and diesel, which he says will return to around 99% of their pre-COVID levels.

However, as consumption is set to recover close to its pre-COVID level, there is a huge amount of excess supply in oil storage tanks around the world. According to the IEA, there are about 625 million more barrels of crude oil in storage than before the pandemic. It could take a year for the economy to burn off all this excess inventory, given the IEA’s demand projection and production estimates for OPEC and other producers.

This oversupply will likely keep a lid on oil prices in 2021. According to the EIA, the global benchmark price, Brent, will average around $ 49 a barrel next year, which is not much higher than its forecast average of $ 43 per barrel for the current quarter. He sees oil starting the year around $ 47 and eventually averaging around $ 50 in 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, vaccine roll-out worldwide may take longer due to potential production issues, unwanted side effects, trial failures and resistance, which could impact recovery. economic and weigh on demand. Meanwhile, OPEC could bring production back too soon, which would keep inventory levels high, weighing on oil prices.

In the face of all this uncertainty, oil companies are adopting an extremely cautious approach to 2021. Oil giants love ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) have already committed to keep spending down over the coming year. Exxon plans to invest $ 16 billion to $ 19 billion in capital projects in 2021. This is down from its 2020 budget of $ 23 billion, which was $ 10 billion below its spending plan. initial. Meanwhile, Chevron only plans to invest around $ 14 billion next year. That’s below the $ 16 billion he planned to spend this year, which doesn’t include Noble Energy’s capital spending that it acquired in 2020.

In addition to cutting capital spending, most oil companies are focusing on cutting costs in 2021 by increasing their scale through mergers. Chevron went with the flow fusion wave by acquiring Noble for $ 13 billion in July, motivated in part by the anticipation of being able to realize savings of $ 300 million. Other notable offers included ConocoPhillips’ (NYSE: COP) $ 9.7 billion with Concho Resources (NYSE: CXO) and Pioneer Natural Resources’ (NYSE: PXD) Purchase of $ 7.6 billion Parsley energy (NYSE: PE). More deals are likely in 2021 as the sector consolidates to weather 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 reduction targets, they could generate a surge of excess liquidity in the years to come. year. This could give them the funds to pay off their debts and buy back their dilapidated stocks.

2021 could be a bumpy year for oil stocks

Oil consumption is expected to recover most of what it lost this year, which, thanks to OPEC’s help in maintaining 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 cost-cutting initiatives across the industry, and oil stocks could rebound this year.

However, navigation is unlikely to be smooth. The industry could face further selling pressure if vaccines are not rolled out quickly enough or if supplies increase faster than expected. Investors should focus on what could be a bumpy ride.