Crude oil can hit $50/bbl in 2021; gas demand to pick up in India: Analysts

Despite the pick-up in economic activity around the globe after lockdowns triggered by the Covid-19 pandemic, Brent crude oil prices are likely to remain range-bound between $35 – 40 per barrel till the third quarter of the current calendar year 2021 (CY21), but move up to $45 – 50/barrel in the second half of CY21, suggests a note by S&P Global Platts. West Texas Intermediate (WTI) crude prices, on the other hand, are likely to hover between $40 – 45/barrel by then. Currently, Brent prices are hovering around the $42/barrel mark.

“Oil balances have been tightening with demand improving from April lows just as the supply response kicked in. But headwinds are plenty with weak refinery margins, an expected slowdown in Chinese crude buying, a strong supply recovery, growing anxiety on the development of COVID-19, on top of bloated global oil inventories,” wrote Chris Midgley, Global Director of Analytics, S&P Global Platts in a recent note.

After dropping by 13 million barrels per day (b/d) from April to June, global oil supply is now starting to recover and is on track to increase by 5 – 5.5 million b/d through July and August, and another 3 million b/d by end-2020, Platts said. For the year, however, global oil supply is forecast to contract by 6.8 million b/d in 2020. For 2021, Platts Analytics forecasts global oil supply to grow merely over 4 million b/d. OPEC (plus Russia), it says, is likely to increase production to meet the growing demand.

Given the increasing concerns of new or second-wave of Covid-19 cases, S&P Global Platts has lowered their 2021 demand estimate to 101.2 million b/d, nearly 1.3 million b/d below that of 2019.

“Global demand recovery continues in June after a strong showing in May. Month-on-month (MoM) growth is expected to hit 4.2 million b/d in June after gaining 3.9 million b/d in May, but July’s increase will ease to 2.9 million b/d,” the Platts note said.

Stepping on the gas

A similar view is shared by analysts at Morgan Stanley, who expect oil prices to remain around $50 a barrel, but expect the demand for gas to pick up pace in India. This, they believe, will be driven by consumers who see gas as a more economical option to the traditional fuels. Asian LNG prices, they believe, are likely to remain range-bound in $3.5 – 5/mmbtu for the next three years.

“In the past three months, gas demand has held up relatively better than most fuels and even at the peak of lock-down had only declined 30 per cent below pre-Covid levels, as industrial and household consumers used piped gas as fuel of choice. With cheap prices and easy access, we see a faster increase in acceptance as a fuel (versus alternatives like LPG and fuel oil) and should add the third pillar to the gas story, which in the past three years has been aided by government policies and cheaper prices,” wrote Mayank Maheshwari and Upasana Chachra of Morgan Stanley in a co-authored June 28 note.

Morgan Stanley expects gas to account for nearly 10 per cent of India's primary energy in 2025 (up from 6 per cent now) driven by higher city gas demand, rise in demand from the fertiliser sector, cheaper gas prices and an improvement in gas infrastructure.

Demand for gas, they believe, is likely to grow at 7.5 per cent (CAGR) between FY20 – 25. “India's consumer gas price has declined 14% in the past two years, and we expect it to decline 29% below F20 levels for the next five years, adding tailwinds to demand growth – a key parameter which we think the market is underestimating,” the Morgan Stanley note said.