The impact of the COVID-19 pandemic hammered the oil industry in 2020, forcing U.S. oil prices to go negative for the first time on record. In a matter of hours on April 20, the May 2020 contract futures price for West Texas Intermediate (WTI) plummetted from $18 a barrel to around -$37 a barrel.
Oil producers were faced with a glut of crude oil that left them scrambling to find space to store the oversupply. Brent crude oil prices also tumbled, closing at $9.12 a barrel on April 21, a far cry from the $70 a barrel crude oil fetched at the beginning of the year.
While the decline of U.S. oil futures into negative territory was short-lived, the fact that the crush on demand was so swift and volatile leads many to question whether oil can fully recover in 2021. In this article, we review the key factors that impacted oil prices in 2020 and what the experts forecast for oil in the year ahead.
- In 2020, worldwide demand for oil fell rapidly as governments closed businesses and restricted travel due to the COVID-19 pandemic.
- An oil price war between Russia and Saudi Arabia erupted in March when the two nations failed to reach a consensus on oil production levels.
- In April, an oversupply of oil led to an unprecedented collapse in oil prices, forcing the contract futures price for West Texas Intermediate (WTI) to plummet from $18 a barrel to around -$37 a barrel.
- By the summer of 2020, oil prices began to rebound as nations emerged from lockdown and OPEC agreed to significant cuts in crude oil production.
- By year's end, optimism over the possible rollout of multiple COVID-19 vaccines buoyed the market; in November, Brent crude oil spot prices increased to an average of $43 a barrel.
Factors Leading to the 2020 Oil Price Drop
The COVID-19 pandemic triggered an unprecedented demand shock in the oil industry, leading to a historic market collapse in oil prices. Demand for oil cratered as governments around the world shuttered businesses, issued stay-at-home mandates, and restricted travel.
While oil prices started strong in January, by April the impact of reduced economic activity created an oversupply and prices plunged dramatically.
Adding to the freefall in oil prices was the oil price war between Saudi Arabia and Russia, initiated on March 8 after the two countries failed to agree on oil production levels. The month-long price war ended in April when the Organization of the Petroleum Exporting Countries (OPEC) and its allies agreed to cut overall crude oil production by 9.7 million barrels per day for an initial period of two months starting on May 1. This represented the single largest output cut in history. Oil production would be limited to 7.7 million barrels per day starting on July 1 and running through Dec. 31, 2020.
OPEC's failure to react swiftly to the need to cut oil production to mitigate against lower demand only added to the volatility and price declines the oil industry experienced during the early part of the year. Despite the OPEC agreement to reduce production levels, crude oil prices had reached some of their lowest levels in more than 20 years by May 2020.
The 1st Half of 2020
During the first six months of 2020, market uncertainties persisted for all energy sources, including liquid fuels, electricity, coal, natural gas, and renewables. High levels of inventory forced Brent crude oil spot prices down from a monthly average of $64 per barrel in January to only $18 a barrel in April.
As summer approached, however, the oil markets started to shift as nations began to emerge from lockdown. For the month of June, Brent crude oil spot prices averaged $40 per barrel, an increase of $11 per barrel from May's average. Production cuts by OPEC and their partner countries (OPEC+) contributed to the decrease in global oil supply and a stabilization of oil prices. In June, OPEC announced they would extend their deepest production cuts through the month of July.
The 2nd Half of 2020
Oil prices continued their rebound from April lows. As the year progressed, market expectations grew that OPEC would continue to limit or delay production increases slated for the following year. As expected, on Dec. 3, OPEC and its partner countries announced they would voluntarily adjust production by 0.5 million barrels per day from 7.7 million barrels per day to 7.2 million barrels per day starting Jan. 2021.
Optimism about the possible rollout of multiple COVID-19 vaccines also buoyed the market. In November, Brent crude oil spot prices increased to an average of $43 per barrel, an increase of $3 a barrel from October's per barrel average.
The U.S. Energy Information Administration (EIA) forecasts total U.S. crude oil production will fall from 12.2 million barrels a day in 2019 to 11.1 million barrels a day in 2021.
The Bottom Line
As the global economy attempts a rebound, many industries will likely face headwinds in 2021. Most notably, hospitality, brick-and-mortar retail, and commercial real estate all face obstacles that might ultimately see them adapting their business models to new global realities.
The oil industry also faces headwinds in 2021 and the years ahead. The potential for new lockdowns and ongoing uncertainty surrounding the return of global economic activity could continue to put downward pressure on oil prices in 2021.
Still, the U.S. Energy Information Administration (EIA) expects average oil prices will increase in 2021. This higher forecast is dependent upon two variables that could prove problematic: rising global demand in the coming year and OPEC's commitment to restrained oil production. The EIA forecasts Brent prices will average $49 a barrel in 2021, an increase from the expected average of $43 a barrel in the fourth quarter of 2020.