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Oil Companies Get a Shot in the Arm

Adnan Zai

What does the fact that COVID-19 vaccinations are sweeping the nation have to do with oil? As it turns out, quite a lot! With the good news of vaccinations being made available to a broader swath of people, Americans are ready to get their travel on. Whether crossing the town to meet with friends or crossing the country on a plane, people who have been locked down for over a year are ready to move. And that is good news for oil companies and their production needs. 2020 was a dismal year for oil, but all signs indicate cautious optimism in the oil world for 2021, especially during the second half of the year.

Oil Companies in the Height of the Pandemic

2020 was nothing short of bleak for oil production companies around the globe. With many countries locked down because of the pandemic, no one was going anywhere, and therefore there was no need for oil. Commuting, traveling, and going out on the weekends all take fuel to get you there, but the pandemic halted the world in their tracks.

CNBC recently reported OPEC’s findings. “The group said world oil demand growth in 2020 declined by 9.8 million barrels per day year on year to average 90 million barrels per day.”

With so much less oil needed, the oil companies eased up on their production in order to avoid a glut. OPEC + cut oil production to an unprecedented level in order to level the playing field when the world shut down, and they are slowly trying to figure out how to get back to pre-pandemic levels.

Expectations for 2021

As recently as a few weeks ago, oil futures were on very shaky ground, and experts were not sure how many companies could rebound in 2021. With the Covid variants popping up around the globe, and some countries instituting new lockdown measures, there were many uncertainties at play.

But in the United States, behind the hard work and optimism of the Biden Administration, the White House is pushing vaccinations, and also ensuring that Americans have a relief package that can help them get moving. The US consumes so much oil, so if their economy is getting back on track, then the oil coffers will begin to be used.

Newsmax reported, “Demand for risky assets such as oil continues to be buoyed by the White House relief package and an almost daily flow of optimistic vaccine headlines,” said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois.

With this news of vaccinations and the age of eligible recipients creeping lower every day, Americans can finally see the light at the end of the tunnel. And for them, this means the ability to leave their homes and get out and travel more safely. Oil is the key to all of this traveling.

JPMorgan expects U.S. oil output to average 11.36 million barrels per day this year compared with 11.32 million bpd in 2020. With such a small percentage of increase, this improvement is negligible at best. But in the shaky, slow-going pandemic world, the trajectory is positive, despite the snail’s pace.

As countries try to recover from the pandemic and the loss of travel and oil use in 2020, little events can also affect the new production of oil in a big way. Newsmax reported, “The United States, world’s largest oil consumer, saw a big draw on U.S. gasoline stocks last week as the winter storm in Texas disrupted refining output.” Even little movements like this in the world can affect the other side of the globe, as became clear during the heart of the pandemic itself.

Oil Companies’ Current Agenda

Although things are moving in the right direction, everything is not perfect yet. CNBC explains that “Uncertainties remain high going forward with the main downside risks being issues related to COVID-19 containment measures and the impact of the pandemic on consumer behavior. Oil futures will mimic the continued control or lack of control for COVID-19.”

But World Oil is optimistic. They maintain that “Over the course of 2021, about 60% of the demand lost last year should be recovered, according to the agency. World consumption will increase this year by 5.4 million barrels a day to average 96.4 million a day.” This increase will help put the oil world back on more solid footing.

OPEC also is assuming a healthy recovery for normal human activities, which will definitely affect the production and price of oil. These predictions imply the expectations of an increased labor market, more industrial production, and even high vehicle sales than in the height of the pandemic last year. People’s personal habits should also factor in. For many people who have been locked down for a year, 2021 should bring a resurgence of travel, whether it be far-flung destinations or even more local places. All will require more oil use.

Spcglobal explains the story has gotten more positive even since January of this year. “The call is pegged at 27.5 million b/d for 2021, compared with OPEC’s January production of 25.5 million b/d, as assessed by independent secondary sources used by the secretariat to track member output.” This shows that even over the past few weeks, forward progress has been made that will impact the oil industry.

Although no one has a crystal ball, the trajectory of the virus seems to be moving in the right direction, and as 2021 progresses, more and more people will move throughout the country. Whether that means commuters are back on the road, or travelers are back in the air, the one thing that they all need is oil. Although the story seems to change daily based on the mutation of the virus and the success of the vaccinations, the future for oil producers is looking much better than the past year, and certainly the second half of 2021 will play out more positively for all concerned.

Adnan Zai

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