Oil prices have managed to claw back their lockdown-induced losses from last year, and we think that they will rise in the coming months as demand continues to revive. Meanwhile, natural gas and coal prices generally fell last month, but remain relatively high.
- Overview – Oil prices have managed to claw back their lockdown-induced losses from last year, and we think that they will rise in the coming months as demand continues to revive. Meanwhile, natural gas and coal prices generally fell last month, but remain relatively high.
- Crude Oil – Prices surged in February as global supply, particularly in the US and Saudi Arabia, remains constrained. While we expect production to gradually revive in the coming months, we still expect prices to increase later this year as the global market should remain in a persistent deficit.
- Natural Gas – Prices fell in Europe and Asia as the colder-than-usual winter weather passed. Prices are likely to fall further as we move into the warmer spring and summer months, but average prices this year are still likely to be higher compared to last year.
- Coal – Prices were broadly flat last month, but remain elevated. The share of coal-based power in European power generation has risen sharply, but we think this will reverse before long. And while Asian coal imports ended 2020 on a high, they appear to have fallen back since and are likely to edge lower still.
- Forecast Summary
Chart 1: Price Performance (% Change, 29th January 2021 – 3rd March 2021)
Sources: Refinitiv, Capital Economics
- Although the rally in US equities stalled in February (2), oil prices soared owing in large part to a collapse in global supply. By contrast, the prices of European coal and natural gas continued to ease back (3) as temperatures picked up compared to January.
- The S&P GSCI Energy Index has now recovered all of its virus-related losses last year, but it is still underperforming other commodity sub-indices (4). That said, we think that energy prices on average will rise this year (5), and that the energy index will outperform.
- The rapid rollout of coronavirus vaccines (6) should enable lockdowns to be lifted soon, which is likely to release pent-up demand for leisure activities. And while some international transport restrictions will remain in place, we expect that jet fuel demand (7) will pick up as domestic travel increases.
Chart 2: US Equities & S&P GSCI Energy Index
Chart 3: European Natural Gas & Coal Prices
Chart 4: S&P GSCI by Category (1st Jan. 2020 = 100)
Chart 5: CE Forecast of Average Prices
Chart 6: Total Coronavirus Vaccine Doses Administered* as a % of Total Population
Chart 7: CE Estimate of Global Jet Fuel Consumption (Mn. BpD)
Sources: Refinitiv, Bloomberg, OurWorldInData, Flightrader24, BP, CE
- Oil prices jumped in February with Brent breaching $65 per barrel for the first time in around a year (8) owing in large part to the recent sharp declines in US and Saudi Arabian oil production. Net-long positions held by investors in the futures market also crept higher (9) amid ongoing optimism about future demand.
- That said, global oil consumption is still significantly below pre-virus levels (10) as transport mobility in major consumers is still fairly depressed (11). Nevertheless, we think that demand will pick up strongly later this year as the rollout of COVID-19 vaccines should allow for the release of pent-up demand.
- Much of the growth in oil demand this year is likely to occur in Europe and the US (12) as these regions experienced the largest falls in oil consumption last year owing to prolonged lockdown measures. Indeed, implied jet fuel demand in the US is still around 40% below its pre-virus level (13).
Chart 8: Oil Prices (US$ per Barrel)
Chart 9: Brent Oil Futures Positioning & Price
Chart 10: Global Oil Consumption (Mn. BpD)
Chart 11: CE COVID-19 Mobility Trackers
Chart 12: CE Forecast of 2021 Global Oil Consumption
Chart 13: US Implied Product Consumption
Sources: Refinitiv, EIA, IEA, Google, Apple, Moovit, Capital Economics
Crude Oil (Continued)
- On the supply side, ongoing voluntary production cuts by Saudi Arabia and strong compliance elsewhere (14) should keep OPEC output constrained in March. However, we expect that OPEC production will rise gradually this year (15) as OPEC will almost certainly agree to gradually ease cuts very soon.
- Elsewhere, US production is set to rebound from the cold weather-related disruption (16) relatively quickly, as the long-term damage appears to be limited. That said, we think that production will remain below pre-virus levels for some time in part because drilling activity has remained weak (17).
- Altogether, a combination of constrained OPEC supply and a revival in global demand means that the global oil market is likely to remain in a deficit this year (18), which will lead to lower stocks and provide support to prices. US crude stocks are already close to their 5-year average (19) and may fall further.
Chart 14: OPEC Production Relative to Quotas
Chart 15: OPEC Oil Production vs Quota
Chart 16: US Weekly Oil Production (Mn. BpD)
Chart 17: US Drilling Rig Count & WTI Oil Price
Chart 18: Global Oil Market Fundamentals (Mn. BpD)
Chart 19: US Commercial Crude Oil Stocks (Mn. Barrels)
Sources: Refinitiv, Baker Hughes, EIA, IEA, OPEC, Capital Economics
- The front-month prices of natural gas fell in Europe and Asia throughout February (20). This was mostly due to the end of colder-than-usual winter weather in the Northern Hemisphere in January, which had caused a huge rise in demand for heating and electricity and a decline in stocks (21).
- With the winter now behind us, front-month gas prices are likely to fall further in the months ahead. However, prices in Europe could start to benefit from some substitution of coal for gas in power generation, not least as our estimates show that the costs of coal- and gas-based power are currently similar (22).
- Meanwhile, Asia’s imports of LNG have already started to drop back, albeit from a high level (23). Finally, although the ‘deep freeze’ in Texas led to a temporary plunge in US gas production (24), the number of active gas rigs (and hence output) looks set to rise (25), which should weigh on prices.
Chart 20: Front-Month Natural Gas Prices
Chart 21: European Gas Storage Capacity (% Full)
Chart 22: Europe Coal Switching & Gas Price
Chart 23: Asia Monthly LNG Imports
Chart 24: US Daily Natural Gas Production
Chart 25: US Gas Rigs & Price (Monthly Avg.)
Sources: Refinitiv, CEIC, AGSI, Baker Hughes, Capital Economics
- Coal prices were flat on the month but remain relatively high (26). As with gas, coal benefitted from the weather-related surge in demand for heating and electricity. Coal-based power was needed to meet much of the extra demand as renewable energy cannot be ramped up quickly or stored in large quantities.
- Indeed, coal-generated power in Europe is much higher compared to last year (27), which has boosted its share in the region’s overall power generation (28) and weighed on stocks (29). However, elevated prices and milder weather should dampen demand for coal-based power in Europe over the coming months.
- Demand for coal in Asia has also been strong, especially in China where imports surged at the end of last year (30). That said, coal demand in the region should also fall as we move into spring. Indeed, the timelier export data show that shipments to Asia have already started to edge lower (31).
Chart 26: Regional Coal Prices (US$ per Tonne)
Chart 27: Europe Coal-Generated Power & Coal Price (% y/y)
Chart 28: Coal-Based Power in European Power Gen.
Chart 29: Coal Stocks at European Ports* (Mn. Tonnes)
Chart 30: China Coal Imports (Mn. Tonnes, Seas. Adj.)
Chart 31: Coal Exports to Asia (Mn. Tonnes)
Sources: Refinitiv, Eurostat, CEIC, Capital Economics
Table 1: Key Forecasts – End-Period
Crude Oil (Brent, US$ per barrel)
Crude Oil (WTI, US$ per barrel)
US Natural Gas (US$ per mBtu)
LNG (Asia Spot, US$ per mBtu)
European Natural Gas (TTF, € per MWh)
Coal (Rotterdam, US$ per tonne)
Coal (Newcastle, US$ per tonne)
S&P GSCI Energy2
Selected Other Commodities
Copper (US$ per tonne)
Gold (US$ per ounce)
Corn (USc per bushel)
Sugar (#11, USc per lb)
Wheat (USc per bushel)
Sources: Refinitiv, Capital Economics