2021: Crude oil ruled commodity markets

Sopuruchi Onwuka

Despite the vigorous push by the advanced industrial nations and environmental activists in 2021 to accelerate transition of demand from fossil fuels to greener renewable energy, petroleum commodities maintained strong market resilience in both demand and price.

In the broader commodities market, oil and natural gas also ruled prices and also dominated transactions in the year.

According to the Energy Information Administration (EIA) of the United States, crude oil and natural gas remained the most demanded fuel choice in the year as the global economy smarted from protracted downturn occasioned by pervasive impact of coronavirus disease and coordinated pandemic containment measures.

The Oracle Today reports that crude oil prices had crashed from over $60 per barrel in 2019 and briefly went negative in mid 2020 as governments embarked on coordinated worldwide lockdowns to contain the spread of the deadly SARS-COV-2 virus which causes the dreaded COVID-19 syndrome.

The lockdown completely halted demand for petroleum fuel as roads went empty and industrial activities went limp across the world; threatening the industry with value destruction and petroleum reliant economies with budget distortions. Oil economies hosted in the Organization of Petroleum Countries (OPEC) had had hit intense fiscal turbulence.

However, prices rapidly recovered in 2021 amid call by industrial economies for deliberate switch from petroleum to green energy options in order to arrest global warming and its ecological consequences. Prices surged with parallel demand recovery as governments and the global health sciences industry collaborated on mass vaccine rollouts, which paved way for lifting of lockdown rules. 

The EIA stated in its latest report that “crude oil prices increased in 2021 as increasing COVID-19 vaccination rates, loosening pandemic-related restrictions, and a growing economy resulted in global petroleum demand rising faster than petroleum supply.”

The rapid recovery of prices also followed the efforts of OPEC and leading non member producers in quickly rebalancing the market by wiping off supply glut to recover commodity value. To drive higher prices, OPEC and its 10 coalition countries controlled petroleum production.

“The slower increase in production was mostly attributable to OPEC+ crude oil production cuts that started in late 2020. OPEC and other countries, such as Russia, that coordinate production with OPEC (referred to as OPEC+) announced in December 2020 that they would continue to limit production increases throughout 2021 to support higher crude oil prices,” the EIA recalled.

“Increasing demand and lower supply of crude oil resulted in consistent global petroleum and liquid fuels inventory withdrawals from February through December and contributed to increasing crude oil prices.

“The largest inventory draw was in February, when Saudi Arabia imposed a cut of 1.0 million b/d on its production, and the United States experienced extremely cold weather that led to well freeze-offs and a 1.3 million b/d decline in crude oil production. 

“Withdrawals were also high in June, one month before OPEC+ announced it would begin increasing crude oil production each month,” the EIA stated.

In its Short Term Energy Outlook (STEO) of last December, the EIA stated that petroleum inventories decreased by 469 million barrels globally in 2021, likely the largest annual inventory withdrawal since 2007.

According to the agency, the spot price of benchmark Brent crude oil started 2021 at $50 per barrel and increased to a high of $86/b in late October before declining in the final weeks of the year.

“Brent’s 2021 annual average of $71/b is the highest in the past three years. The price of West Texas Intermediate (WTI) crude oil traced a similar pattern to Brent and averaged $3/b less than Brent in 2021,” the agency stated.

The 23-nation OPEC+ coalition on Tuesday announced intention to release more 400,000 barrels a day of oil into the market in response to tight outlook for the oil market.

The group which held preliminary meeting on January 3 envisaged weaker supply growth from rival producers.

“According to our December 2021 Short-Term Energy Outlook (STEO) estimates, U.S. crude oil production in 2021 decreased by 0.1 million barrels per day (b/d) from 2020 and by 1.1 million b/d from 2019. Cold weather in February and hurricanes in August contributed to this decrease, but it also was a result of the decline in investment among U.S. oil producers since mid-2020,” the EIA said..

In the overall commodity market, EIA also reported that energy prices rose more than other commodities in 2021

It attributed the higher energy commodity prices throughout 2021 to several factors including weather disruptions, such as the February winter freeze and Hurricane Ida; increased demand for gasoline and diesel; and increasing demand for crude oil and natural gas at a rate faster than increased production.

It said energy prices used in the S&P Goldman Sachs Commodity Index (GSCI) ended 2021 59 percent higher than the first trading day of the year, adding that price increases were largely driven by increased demand from the initial phase of global economic recovery from the COVID-19 pandemic.

“By comparison, most other commodity indices included in the GSCI increased by about 20 percent.”

The energy index of the GSCI increased more than twice as much as the industrial metals index on a percentage basis during 2021, the next highest commodity index group price change,” the agency stated in a report.

The precious metals index was the only one to decline.

The GSCI is a commodity index that tracks the performance of global commodities markets. The index is a weighted average of commodity prices; it updates the weight it allocates to each commodity every year.

In 2021, the energy index group made up 54 percent of the GSCI, and two crude oil benchmarks, West Texas Intermediate (WTI) and Brent crude oil, accounted for approximately 70 percent of the weighting in the energy sector index. WTI crude oil makes up the largest share of the overall GSCI at more than 21 percent.

Prices in energy commodity futures markets greatly increased throughout 2021. For example, the futures price of RBOB (a reformulated grade of gasoline used as the benchmark for gasoline trading) increased by 67 percent during 2021.

The only commodity included in the GSCI that increased more was coffee, whose futures price increased by 81 percent during 2021.

Among energy commodities, prices for petroleum products such as the RBOB and the ultra-low sulfur diesel or ULSD, used as a benchmark for heating oil trading, increased the most during 2021, at 67 percent and 64 percent, respectively.