Energy stocks have taken a severe lashing this year. For the year to date, the energy sector has dropped by around 36% as the COVID-19 pandemic has kept drivers off the world’s roads and passenger jets out of the world’s airspace. Reduced production from the OPEC+ group of producer nations has also played a role in reducing the glut in crude inventories.
While the pandemic is primarily responsible for the sharp drop in demand for transportation fuel, investor enthusiasm is soaring for vehicles and technologies that do not use fossil fuels. Just as Tesla’s market cap is larger than that of the next seven largest automakers combined, the electric vehicle maker’s market cap is larger than the combined market cap of Chevron, Shell, Total, PetroChina and Petrobras, the second through sixth largest oil and gas companies. Saudi Aramco’s $2.1 trillion market cap is in a league of its own.
The good news for oil and gas producers is that prices are forecast to rise next year. According to the U.S. Energy Information Administration’s (EIA) December update to its Short-Term Energy Outlook, Brent crude (the international benchmark) is expected to end the year at around $41 a barrel, while West Texas Intermediate (WTI ), the U.S. benchmark, is tabbed to close 2020 at around $39 a barrel. The EIA’s forecast for 2021 calls for Brent to average $49 a barrel and WTI to average $46 a barrel. For the fourth quarter of next year, the EIA is forecasting Brent to rise to $50 a barrel.
Remember, 2019 was not a great year for oil either. WTI closed 2018 at around $65 a barrel, and the price at the end of the year had dropped to $57.
As prices rise now on hopes for an improved economy, oil and gas companies will be looking for opportunities in 2021 to meet the goals they had set for 2020. Those goals include reducing capital spending and improving returns to investors.
One big difference between 2020 and 2019 has been the number of announced mergers. The big deal in 2019 was Occidental’s $38 billion cash-and-stock acquisition of Anadarko. There were no deals of that size in 2020, but some large companies found partners willing to accept stock instead of cash and several deals got done.