Historically, oil prices have been hampered by an excess of supply, which has dwarfed demand and triggered widespread depreciation.
However, the landscape was somewhat different during the coronavirus pandemic, as demand sank to record lows and placed an even greater burden on prices (the value of crude oil fell below $30 in Q2 last year as Covid-19 took hold across the globe).
As the global economy recovers, the market is now seeing a scenario where producers are struggling to pump enough oil in August to meet rising demand levels. But what’s the current state of affairs, and what’s next for oil in 2021 and beyond?
What’s the Current Status Quo?
OPEC and its allies certainly struggled manfully through August, when producers were unable to keep pace with global demand as coronavirus concerns eased.
This is creating significant upward pressure on prices, as a number of key OPEC+ members (including Nigeria, Kazakhstan and Angola) continue to struggle with diminished output levels following years of under-investments and delayed maintenance work.
Another key issue here is the increased investment in renewables, as demand for fossil fuels declines and the global energy market remains in a state of transition.
This, combined with a sudden and exponential surge in demand through the first half of 2021, has meant that production is now falling below targets and causing prices to rise incrementally.
A Focus on Africa – How are Exporters Doing?
As we’ve already touched on, two of the key African oil exporters (Nigeria and Angola) have experienced significant issues this year, with a lack of sustained investment one of the most pressing.
However, Covid-19 also delayed some much-needed maintenance work at rigs and refineries, and the decision to carry this out all at once has severely restricted oil output through 2021 so far.
To this end, these two countries have pumped an average of 276kbpd below quota so far this year, with this following the decision of OPEC in July to add 400,000 barrels per day to production between August and December 2021.
To plug this gap, Nigerian firms are now rushing to complete maintenance works and boost output, creating potential issues when it comes to the quality of work and increasing the risk of further delays going forward.
Will Oil Remain Number One in the Future?
According to Tickmill, “oil prices are poised to retest yearly highs on the back of strong upside momentum.” Extremely high gas prices are also forcing consumers to switch to oil, which is likely to send oil prices soaring even higher in the short-term.
But what about the longer-term, especially given the rise of renewables and the suggestion that existing fossil fuel supplies could be diminished by 2060?
Well, OPEC sees oil demand returning to per-pandemic levels by 2023, with the current demand surging by 1.7 million barrels per day. What’s more, this demand dictates that up to $11.8 trillion will be required between now and 2045 in the upstream, midstream and downstream, ensuring that oil will remain number one in the global energy mix for the foreseeable future.
By 2045, oil will provide approximately 28% of global energy needs, highlighting its continued importance in a volatile and fast-changing world.