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S&P Global Platts Analytics 2021 Energy Outlook

posted onJanuary 13, 2021

Analysts at S&P Global Platts released their 2021 energy outlook. The outlook presumes a recovery in global gross domestic product (GDP), highlighted by an acceleration of growth in the second half of 2021. 

Dan Klein, Head of Energy Pathways, Analytics, S&P Global Platts, said: "2020 was a year that proves that there is no such thing as 20/20 vision when it comes to forecasting energy markets and pricing. There will undoubtedly be unforeseeable twists and turns over 2021 that will bring rise to even more risks to the forecasts. But fundamentals will continue to matter more than they ever have, requiring a steady, holistic perspective across the breadth of the energy market."


COVID-19 & bumpy ride for oil demand: Oil demand will rebound by more than 6 million barrels per day (b/d) in 2021, but consumption is still expected to be more than 2 million b/d below that of 2019's 101.9 million b/d. Why? The global middle class - the real engine of oil demand - faces continued pressures from wealth inequality and the ongoing COVID-19 cloud.

Jet Fuel: Due to the sharp reduction in air travel, kerosene/jet fuel demand represented more than a third of the overall demand decline in 2020, falling by 3.1 million b/d. Jet fuel will remain the laggard going forward, keeping distillate supply more in surplus through the first half and refineries operating more in gasoline-production mode.

OPEC+ will be the dominant factor for 2021 oil supply: Political risk: Libyan supply will continue to defy expectations, rising to 1.2 million barrels per day (b/d), subject to the tenuous ceasefire. With a new US Administration, supply upside could come from Iran and Venezuela, though progress promises to be slow. Policy/cohesion: It will be increasingly difficult for OPEC+ to walk the tightrope between volume and price, with the organization looking to both increase revenues and prevent a sizeable rebound in US market share. Shale impact: US oil production is set to decline another one-million b/d in 2021 on a year-over-year basis due to steep declines in the shale base, with slow pick up in rigs/frack crews.

Oil prices: Overall, fundamentals will resume the ascendancy over sentiment, which should see Dated Brent oil prices soften in the short-term to the low $40s-per-barrel area, but should prompt a price move toward $50 per barrel by the end of 2021, with WTI to recover to just under $50/b. 

2021 Energy Outlook

Squeezed refiners need a demand outlet or face closure: Even assuming a rebound in refined product demand in 2021, growth in refining capacity, largely in the Middle East and Asia, will be far larger. A continued influx of biofuels and NGLs supply will continue to weigh on crude run rates in 2021. This will squeeze margins of existing refineries, particularly if demand recovery for transportation fuels remains sluggish. Refinery closures are inevitable. Refineries well placed to survive will have a focus on costs, local markets, and integration with petrochemicals or transformation into bio-refineries.

Petrochemicals feedstock volatility to surge as plastics take the lead: As the only sector with positive oil demand growth in 2020, the petrochemical sector's growth will accelerate in 2021 by 4%, driven by a recovery in durable goods (propylene derived products) and further growth in demand for packaging (ethylene derivative products). The relative strength in petrochemicals demand compared to the weakness in gasoline demand will cause regional competition and volatility in feedstocks, specifically ethane and naphtha. 

Gas-to-coal switching may not be enough to prevent Henry Hub (HH) prices from hitting seven-year highs and LNG shut-ins. For natural gas, we see mixed fortunes ahead, with HH in the US set to recover all of its losses to test $3/MMBtu. In Europe, TTF and Platts JKM, the benchmark LNG delivered into North Asia, will both see fundamentals weaken. The US natural gas supply faces a loss of associated gas production from weaker shale oil drilling and higher ethane recovery in 2021. 

New (super-chilled) cold war between US and Russia LNG/g as in Europe: The delayed completion of the Nord Stream 2 pipeline in 2Q 2021 will join the recently-completed Trans Adriatic Pipeline (TAP) and rebounding Algerian gas flows as incremental gas supply flowing into Europe. With too much supply chasing too little European demand amid record high storage, US LNG exporters could be on the outside looking in during 2021.

Asian LNG buyers remain in the driver's seat despite demand surge: Asian LNG demand will rebound sharply in 2021, but weak European LNG demand, a 3.5% expansion of global new liquefaction capacity, and low oil-linked LNG contracts, will keep buyers flush with options for supply over the next year. Expect demand and price seasonality to intensify in 2021, with both winter tightness and summer cargo cancellations occurring over the year.

The Platts JKM forward curve is showing strong backwardation, implying the market views the current tightness as short-lived. Prices are expected to trend lower moving into first quarter 2021, particularly if the Asia-Pacific region experiences another mild winter. Assuming no further large supply disruptions, Platts JKM in Q1-21 should outturn below $6.75/MMBtu and average just over $4/MMBtu during summer 2021.

Renewables, nuclear, and renewable fuel growth to accelerate and further challenge fossil fuels: New wind and solar capacity build will increase in 2021, driven by a host of grid-parity solar projects in China, a rebound in Indian installations, and deferred US installations from 2020 into 2021. 

Market drivers for grains: Uncertainty over continuing Chinese purchases of corn, soybeans and wheat, along with the impacts of a La Nina on already dry areas globally, will be market drivers in early 2021. With a new administration, expected to be more trade-friendly, to take office in the United States, exporters are hoping to gain a larger markets share of Chinese import demand in all three major grains and oilseeds.