2021 Oil and Gas Industry Outlook

2021 Oil and Gas Industry Outlook

Here at the end of 2020, we are pausing and reflecting on what we can expect for 2021. I think most people are hoping for and expecting a better year in 2021 than we had in 2020. Of course, only time will tell if the new year will be better or worse. The COVID-19 epidemic was the primary defining factor for 2020 being such a bad year in most people’s minds. It was certainly a huge factor for the oil and gas industry. Long term, I am afraid the new regime will wreak even more havoc on this country than COVID-19 has. The long-term danger that a Biden/Harris administration represents to the national economy and the oil and natural gas industry can not be overstated.

At the risk of oversimplifying things, I would say the single factor most representative of the oil and natural gas industry’s health is price. Shorthand, we can say high prices represent good times in the industry, and low prices represent bad times. The interaction between supply and demand primarily determines price. I have seen nothing that has substantially changed in supply and demand for 2021 from 2020. So, I see no reason for any substantial price changes, especially on the upside next year. The only major exception I can foresee is if COVID-19 is brought under some semblance of control and economic activity resumes back to somewhat close to normal, then we could get an increase in demand and some positive movement in price.

Let us look at the microeconomic perspective of oil prices on one small production company before looking at the macroeconomic impacts on the general economy. I own a production company with some royalty and override interest and several non-operated working interests. Therefore, I have not only a public policy general interest in the price forecast, but I have a personal interest. My financial well-being is impacted by actions based on whether or not my understanding of where the oil and natural gas market is headed is correct. In late 2017 and early 2018, we entered a couple of drilling programs — horizontal wells — one was in the Eagle Ford, the other in the Permian. The Permian program would probably be in a slight profit status if prices had stayed close to where they were when we signed up for the drilling deal. However, we have gotten about 80% of our money back so far, and if we are fortunate and prices go up a little, and the production decline flattens out, we may make our investment back. I will be very surprised if we end up getting 30 to 40% of our investment back in the other program.

With investment results like this, I will be extremely cautious about committing any more capital to oil and gas investments. I would only consider projects that have cash flow with a high probability of capital return and a short-term time frame. At current prices, I doubt if 2021 will be much more than a breakeven year for my company. With the current supply and demand situation, I don’t foresee much of a change in prices for 2021. In fact, while natural gas prices during 2021 may have an increase of 20 or 30% (the low starting point makes this level of increase a fairly minor positive), oil prices will likely meander around in the 40-to-50-dollar range. If things get much worse on the supply side and demand doesn’t recover from COVID-19, I could see a drop into the twenties for a short period of time. I want to give you a caveat about my price predictions; the following statement has been attributed to both Mark Twain and Yogi Berra — It’s difficult to make predictions, especially about the future.

As we close, I want to briefly touch on the macroeconomic facts of supply and demand, showing why I don’t think oil prices will move substantially in 2021. Let’s look briefly at the supply side. OPEC+ is currently withholding 7.7 million bpd from the market. Starting in January of 2021, that will be adjusted to 7.2 million bpd. This overhang will function as a lid on prices since every time prices start to move up, economic realities will cause the members of OPEC+ to increase production and sell more oil. This action will tend to stop the rise in oil prices. Libya and Venezuela are starting to return to normal production levels. The new Biden/Harris regime may reduce or end the embargo on Iran. These factors all have the potential to add more oil supply, dampening oil prices. Examining the demand side of the equation shows no real positive news, either. As we noticed earlier, even if the COVID-19 vaccinations work and the economy and oil demand come back strong, it will be at least the middle of the year before that happens. The market is also dealing with numerous government mandates that reduce demand for petroleum products by mandating a certain percentage of zero-emission vehicles, a high percentage of electricity production by renewable resources and forbidding pipelines being built to discourage the use of natural gas.

About the author: David Porter has served as a Railroad Commissioner (2011–17) and Chairman (2015–16), as well as Vice Chairman of the Interstate Oil and Gas Compact Commission (2016). Prior to service on the Commission, Porter spent 30 years in Midland, Texas, as a CPA working with oil and gas producers, service companies and royalty owners. Since leaving the Commission, Porter works as a consultant for oil and gas companies. He also serves as Chairman of the 98th Meridian Foundation, a nonprofit concerned with water, energy and land issues.


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