OPEC+ will continue to make timely oil supply changes, which should reduce price volatility, even though demand is unlikely to fully recover by the year end, according to international rating agency Fitch Ratings on Tuesday.
Gradual improvements in the global oil and gas sector's performance next year will be driven by higher average prices, though the improvements will be moderate and lack certainty, the agency said.
It forecast that oil demand is unlikely to recover in full by the end of 2021 unless quick progress is made with mass vaccinations against the coronavirus.
"However, OPEC+ will monitor the situation and manage supply in order to avoid large market imbalances, which should reduce oil price volatility in 2021," it said.
OPEC and non-OPEC oil-producing nations, like Russia, a grouping dubbed OPEC+, will announce their decision later on Thursday on how much oil to pump next year with a two-day delay due to differences between member countries.
The group may extend the current production cut of 7.7 million barrels per day (bpd) or reduce the volume.
According to the production cut deal signed in April, OPEC’s oil-producing countries will collectively cut 5.8 million bpd starting from Jan. 1, 2021. However, countries like Iraq, Nigeria and Kazakhstan are in favor of a higher production level.
A quicker-than-expected energy transition could disrupt the sector. Most major oil companies are targeting steady emissions reduction and decarbonization.
Expecting less severe and more localized lockdowns than those introduced in the first half of 2020, Fitch Ratings also estimates a moderate increase in average oil and gas prices in 2021, coupled with continued spending discipline, to support a gradual recovery in oil companies' financial performances.
Refining margins should also slightly recover but will remain depressed due to historically low utilization rates, it said.
- Pace of decarbonization could weigh on oil prices
The majority of oil and gas companies have substantially revised down their 2020 capital expenditure budgets and will not increase them significantly in 2021, the agency said and added that the cost-cutting trend would continue, and for most firms, dividends would not be a priority.
"We expect most sub-sectors to show some improvements in 2021, but oilfield services (OFS) companies will continue to be under more pressure compared with companies in the upstream, midstream and downstream segments," it said.
According to the agency, the low-carbon energy transition will be gradual, and in the medium term will not bring major disruptions to the market. However, as a result of tighter regulation or technological developments, the pace of decarbonization could weigh on oil prices and bring some ratings under pressure.
The major European oil companies have been responding to this trend by introducing carbon intensity and emission reduction goals.
"We expect that hydrocarbons will continue to dominate in the majors' operating cash flow until at least 2030, but the share of Capex designated for low-carbon projects, such as wind and solar generation, biofuels, hydrogen and carbon capture, utilization and storage solutions, will significantly increase. The majors could also accelerate integration into the renewables sector through large-scale acquisitions," the agency said.
By Sibel Morrow