Oil prices will remain volatile and highly-sensitive to changes in supply and demand this year, which will underpin near-term oil prices in the range of $40-$45/barrel, according to Moody’s.
Asian economies, China and India, are leading the rebound in industrial and transportation demand for oil which will help to keep rebalancing the market in the wake of the pandemic.
“We do not see a return to (production) growth in North America, where producers curtailed investment and are using free cash flow to repay debt in anticipation of more stringent regulation and green energy policies under the new administration,” Moody’s said.
The incoming Biden administration in the US will focus on bolstering and enforcing regulation of the energy sector to help reduce carbon emissions and accelerate the energy transition.
“But low oil prices, reduced cash flow and diminished capital access will also keep growth investments flat outside of the US,” the report added.
The return of Libya and possibly Iran to the export markets in 2021 would imply further risks for prices, especially if the demand takes longer to recover, with light crude barrels from Libya disrupting regional oil pricing.
It added that operating cash flow will improve but remain weak for the integrated oil companies in 2021, and capital spending will remain even with 2020 levels.
But many integrated companies will continue to shift spending priorities towards low-carbon efforts, maintaining or even increasing their low-carbon budgets for 2021.
However, stronger exploration and production companies will lead a recovery and pursue consolidation opportunities to become more cost-competitive, increase scale and capital flexibility, and rationalise higher-cost production.
In India, state-run Oil and Natural Gas Corporation will maintain high level of capital spending as the government has been encouraging public sector companies to do so as a means to revive the economy.
On the other hand, refiners worldwide will struggle to generate positive free cash flows in 2021, with slow recovery in demand, high inventories, excess capacity and low refinery utilisation rates.
There will be some capacity rationalisation in the sector this year to bolster margins, Moody’s added.
Growth in the midstream oil sector companies will slow or halt this year with no more than 0%-2% growth from last year, Moody’s added.