Oh what a 'crude' year 2020 turned out to be as the
Covid-19 pandemic ravaged the global economy and our lives, and even briefly
created the aberration of negative oil prices back in April. Few would be
unhappy to see the back of 2020, and
the Oilholic is most certainly among them.
However, as a new trading year beckons, it is best cut
out the din, and trade both the direction of the oil market as well as energy stocks with a level head. First off, all the doomsday oil demand
decline scenarios from earlier in the year, of as much as 20 million barrels per day (bpd) on 2019 levels, simply did not materialise.
The actual figure is likely to be shy of 9 million bpd,
which, while wiping out nearly a decade's worth of demand growth on an
annualised basis, is nowhere near as catastrophic. Economic signals point to a rebound in post-pandemic demand when human mobility,
consumption and core economic activity, especially in East Asia and the Indian
subcontinent begin a rapid bounce back in 2021.
So what of the oil price? Using Brent as a benchmark, the
Oilholic envisages a short-lived bounce to $60 per barrel before/by the midway point of the year,
and on the slightest nudge that civil aviation is limping back to normal. However,
yours truly firmly believes it won't last.
That's because the uptick would create a crude producers' pile-on regardless of what OPEC+ does or doesn't. Say what people might, US shale
isn't dead and there remains a competitive market for American crude, especially light sweet crude, that will perk up in 2021.
Other non-OPEC producers will continue to up production
on firmer oil prices as well. And finally, a Joe Biden White House would bring
incremental Iranian barrels into play even if the return of the Islamic Republic's
barrels is more likely to be a trickle rather than a waterfall. All of the
above factors will combine to create a sub-$60/bbl median for the demand recovery year that 2021 will be. And the said price range of $50-60 will
be just fine for many producers.
As for energy stocks, who can escape the battering they
took in 2020. By the Oilholic's calculations, valuations on average fell by 35% on
an annualised basis, and nearly 50% for some big names in the industry.
However, based on fundamentals, where the oil price is likely to average in
2021 (~base case $55/bbl), portfolio optimisation and an uptick in demand,
yours truly expects at least a third of that valuation decline to be clawed
back over the next 12 months. And depending on how China and India perform, we could see a 15-20% uptick.
Of course, not all energy stocks will shine equally, and the Oilholic isn't
offering investment advice. But if asked to pick out of the 'crude' lot – the
horses yours truly would back in 2021 would be BP and Chevron. That's all for
the moment folks! Keep reading, keep it 'crude'! Here's to 2021!
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© Gaurav Sharma 2020. Photo: Terry McGraw/Pixabay