Our 2021 Energy Sector Predictions
When I made my 2020 predictions a year ago, the world was on the cusp of a coronavirus pandemic that would upend the oil markets. In the process, the pandemic also upended two of my energy sector predictions, but three others proved correct.
The COVID-19 pandemic last year was a “black swan” event that caused unprecedented fallout across the energy sector. The evolution of the pandemic this year will be the largest variable impacting the energy sector. Yes, larger even than any policies our new president will enact.
The energy sector is already off to a fast start in the equity markets this year, as the market anticipates a return to normal. But if those expectations falter and it takes longer than expected to get the pandemic under control, there is a risk of a significant pullback.
Against that backdrop, below are my predictions for significant energy trends this year. As I usually point out, the discussion behind the predictions is more important than the predictions themselves. That’s why I provide extensive background and reasoning.
I also make predictions that are specific and measurable. At year’s end, certain metrics will indicate whether a prediction was right or wrong.
1. The average price of WTI in 2021 will be between $50/bbl and $55/bbl.
Oil is still the world’s most important commodity, so I always try to lead off with a prediction on the direction of oil prices. I generally make this prediction by looking at supply and demand trends, as well as inventory levels.
A year ago, I thought my prediction was aggressive, but sound. I believed oil prices would be strong all year. But this was one prediction the pandemic undermined within a month of my making it.
Because we don’t know how long it will take to get the pandemic really under control, there’s a lot of uncertainty around the direction of oil prices. Oil prices rallied in the fourth quarter and are now close to where they were a year ago. That trend anticipates a strong recovery. However, OPEC is sitting on spare production capacity that the cartel can bring online if demand starts to rise. That would provide headwinds for oil prices.
In 2020, the average daily price for West Texas Intermediate (WTI) was $39.16 per barrel (bbl), nearly $20/bbl lower than in 2019. This year, I think it’s almost certain that WTI will average higher than it did last year, but it’s doubtful that it averages as much as it did in 2019.
The spot price of WTI is presently $53.00/bbl. Demand is still trending lower than it was a year ago, which presents some risk of prices falling further. OPEC will likely be a cap on the high side. Thus, I predict that the average annual price for WTI in 2021 will be between $50/bbl and $55/bbl.
However, I will add a couple of caveats. If one of the new variants of COVID-19 isn’t covered by available vaccines, or if it takes longer than expected to get the pandemic under control, oil prices will break back below $50. But if the pandemic is brought under control quickly, we could see a strong recovery in oil prices that could break above $55.
Energy demand in the U.S. is weaker than it was a year ago, but that isn’t the case for all countries. OPEC is still ready to ramp up production, but it is possible that prices may get ahead of OPEC action.
2. Total U.S. oil production will decline for the second straight year.
According to the Energy Information Administration (EIA), U.S. oil production plummeted in the second half of 2020. At present, year-over-year production is 2 million BPD lower than it was a year ago. The number of rigs drilling for oil has risen in recent weeks, but it is still down 57% from a year ago.
President Biden has already suspended new oil and gas leasing and drilling permits on U.S. lands and waters for 60 days. He has also cancelled the permit for the Keystone XL pipeline, signaling that this administration will not be friendly to the oil industry.
All of this points to the likelihood that U.S. oil production will continue the decline it began in late 2020. I expect the decline to slow and perhaps stabilize, but it would take a strong reversal to see U.S. oil production grow in 2021.
3. The average natural gas price will be at least 25% higher than it was in 2020.
Last year I predicted that natural gas prices on average would hover at the lowest level in more than 20 years. That did in fact happen. The average Henry Hub natural gas spot price for 2020 was $2.03/MMBtu, which was the lowest annual average since the EIA began tracking that data in 1997.
But falling oil production means a decline in natural gas supplies that are associated with that oil production. That tightens up supplies, which was a factor in the subsequent recovery of natural gas prices in late 2020.
I predict that recovery will continue into 2021. I expect natural gas prices to average above $2.50/MMBtu in 2021, which would represent a ~25% or more increase above 2020.
4. U.S. oil imports will increase in 2021.
U.S. oil imports have steadily declined since 2005, when they averaged 10.1 million BPD. There was a brief reversal in 2016 and 2017, a consequence of lower prices that negatively impacted U.S. oil production. But by the end of 2020, crude oil imports had fallen to 6 million BPD.
I expect this trend to reverse in 2021. A combination of last year’s price collapse and new regulations from the Biden administration will likely drive U.S. oil production lower this year, but overall oil demand will recover. That means more imports will be called upon to fill the void.
5. ConocoPhillips (NYSE: COP) will post a total return of at least 30%.
I generally like to close with a prediction on ConocoPhillips, which is the world’s largest publicly traded, pure oil and gas producer. Last year I predicted it would return 20% on the year. The company was positioned to have a good year before the pandemic caused oil demand to collapse. So instead, ConocoPhillips closed the year down nearly 40%.
As I write this, the year-over-year WTI price is 8.7% lower, but shares of ConocoPhillips are still 32% lower than they were a year ago. The company is positioned to cover dividends and capital expenditures with WTI at $40/bbl. At >$50/bbl, the company should do quite well.
Barring another collapse in oil prices this year, I expect the market to eventually acknowledge the value proposition. As I stated a year ago, even if oil prices collapse, I expect ConocoPhillips to weather the storm. The company has been around for a long time and it’s one of the best-managed oil producers on the planet. The company also has significant exposure to natural gas, so higher gas prices will be icing on the cake.
There you have my 2021 energy sector predictions. As always, I will grade them at the end of the year.
Editor’s Note: As Robert Rapier’s article makes clear, the pandemic still poses risks to your portfolio. More than ever, you need to be selective with your investments.
The economy is improving, stocks are rallying, and the roll-out of vaccines provides hope that we’ll get the coronavirus under control. But we’re not out of the woods…not by a long shot.
That’s why our investment team has put together a special report: “5 Red Hot Stocks to Own in 2021.” In this report, we provide the names and ticker symbols of the highest-quality stocks to own for the new year. Click here for your copy.