How high can oil prices go in 2021?

Progress in vaccine development and expectations that OPEC+ will decide in less than two weeks to roll over the current cuts for three months instead of easing them from January 2021 give bulls hopes that the oil market will regain some semblance of a balance next year, pushing prices higher.

Currently, the general consensus among analysts and agencies is that oil prices will indeed see an upside in 2021 as above-average inventories will draw down with a global economic and oil demand recovery.

Several bullish signals in recent weeks have made oil market participants and analysts more optimistic about the oil market next year, despite the current second wave of COVID-19 infections sweeping across Europe and the world’s biggest petroleum consumer, the United States.

First, crude oil and petroleum inventories in the U.S. are still above five-year average levels, but they have dropped from their peaks earlier this year, according to estimates from Reuters market analyst John Kemp based on EIA data.

Next, oil demand in Asia has visibly strengthened in recent weeks, giving the oil market hope that at least in one region, demand is strong in the fourth quarter.

Then, hopes of an effective vaccine receiving FDA approval soon also instill hopes that life could return to some form of normality at some point in 2021.

All these factors resulted this week in the shallowest contango in the front-month and six-month spread in the Brent Crude futures market since July, suggesting that market participants now expect vaccines and economic recovery next year to help market rebalancing, which would push oil prices higher.

Current expectations about oil prices point to gains, especially in the latter half of 2021.

The EIA expects in its November Short-Term Energy Outlook (STEO) that as global oil demand rises, inventory draws in 2021 will cause some upward oil price pressures, and Brent is expected to average UD$47 a barrel next year, up from US$44 per barrel early on Friday.

The latest monthly Reuters poll of analysts, before the vaccine progress announcements, expected Brent prices to average US$49.76 per barrel in 2021, down compared to US$50.41 expected in the previous survey.

However, risks to oil prices are likely still skewed to the downside, as surging COVID cases in the U.S. and Europe are prompting renewed lockdowns, curfews, mask mandates, and restrictions, which would weigh on economic activity and transportation demand in the near term.

The uncertainty about how bad oil demand will be hit and how fast developed economies and demand would recover from this second wave will continue to pressure prices to the downside, at least early next year.

The vaccine impact on oil demand and spot oil prices is not expected to manifest in the first half of 2021, the International Energy Agency (IEA) said last week.

Moreover, in the coming week, fuel demand in the U.S. will not receive its usual Thanksgiving travel increase as only 35 percent of Americans will be traveling for the holiday, down from 65 percent in 2019, even if Thanksgiving gasoline prices will be the lowest since 2016, a GasBuddy survey showed.

“The survey results show continued anxiety from motorists even with the lowest Thanksgiving gas prices in years, highlighting the challenges we’re facing in this pandemic,” said Patrick De Haan, head of petroleum analysis at GasBuddy.

The muted holiday traveling will come after a build in U.S. gasoline inventories even if gasoline production dropped.

In the week to November 13, gasoline inventories rose by 2.6 million barrels, compared with a decline of 2.3 million barrels for the previous week, the EIA said in this week’s inventory report.

Gasoline production averaged 9.1 million bpd last week, versus 9.3 million bpd a week earlier. Distillate inventories dropped, but they are still some 11 percent higher than the five-year average for this time of the year.

Another concern for U.S. inventories and prices is that stocks at Cushing—the designated delivery point for NYMEX crude oil futures contracts—have risen to 81 percent of capacity.

EIA data showed that commercial crude oil stocks at Cushing rose by 1.2 percent in the week to November 13. At 61.6 million barrels, inventories are 39.3 percent higher than at this time last year.

The pace of recovery from the current challenges to oil and fuel demand and the rate of stock drawdowns next year will determine the trend in oil prices until safe and effective vaccines become available to a critical mass of people.

“Once rolled out, the vaccine should ensure a recovery in oil demand back towards trend. But first inventory levels and spare capacity held by OPEC+ need to be reduced and this may take us towards the second half of 2021 before a meaningful oil price recovery can occur,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said last week