Geopolitics and pandemic uncertainty to dominate oil market in 2021
Oil prices, which are key to the public finances of many MENA states, have recovered somewhat since their abrupt slump earlier this year but experts are not optimistic they will regain the levels seen at the start of 2020
Uncertainty around vaccine timelines are haunting oil-producing countries, especially those in the Middle East, which continue to face the threat of geopolitical escalation. The volatile international sphere poses a unique and unpredictable set of challenges for the oil market, experts have said.
The decline in demand in the wake of the coronavirus pandemic caused commodity markets to suffer unprecedented falls this year.
In April, the price of West Texas Intermediate oil futures turned negative for the first time ever, as Brent crude dropped to $20 a barrel for the first time in decades. Between February and April, oil prices declined by 60%.
Prices have somewhat recovered, with Brent trading at $42.35 on Wednesday afternoon. The Institute of International Finance expects oil to average at $47 while the IMF expects prices to average at $46.70 — both far below where the market started 2020 at $66.
However, experts said that oil markets could only potentially return to pre-crisis demand levels in 2022-23, following the deployment of a coronavirus vaccine.
“We expect Brent to average at $42 per barrel in 2020,” Garbis Iradian, chief economist, MENA, at the Institute of International Finance told GlobalMarkets. “Lower oil prices have raised additional challenges for MENA oil exporters in addition to the Covid-19 pandemic. The combination resulted in lower crude oil production [due to the Opec+ agreement] and major fiscal challenges.”
The oil market remains characterised by “elevated uncertainty”, owing to the pandemic, according to the IMF’s world economic report. It said risks were balanced, with escalating geopolitical events in the Middle East, faster containment of the pandemic and excessive cuts in oil investments the main upsides, and renewed slowdown in global economic activity and stronger oil production growth in non-Opec+ countries some of the downside risks.
But experts said geopolitical uncertainty and regional tensions will be key to the recovery of the oil market. The attack on Saudi Arabia’s Abqaiq oil facilities last fall had a sharp but short-lived impact on the oil market. As long as geopolitical tensions continue to simmer, particularly between Iran and Saudi Arabia, the oil market will vulnerable to devastating shocks.
“If the global economy has a beating heart, it is the Abqaiq processing facility. There are few things worse in terms of a single event for the global economy than a damaging attack on Abqaiq that Saudi Arabia could not fix,” said Robert McNally, president of the Rapidan Group.