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Oil Prices In 2021 May Look Oddly Familiar — And Squeeze Shale
By: Investor's Business Daily | December 28, 2020

A weary world rejoiced as the coronavirus vaccine began its rollout in December. Oil prices hit $50 per barrel, the highest levels since March, on the news. But the celebrations were short-lived as medical experts warn of a long dark winter ahead.

In fact, optimism in the oil markets was premature as analysts say oil prices are in for a rough first half of 2021. New lockdowns have arrived, OPEC is set to increase supply, and President-elect Joe Biden has vowed to hammer out a new Iran nuclear deal; all of which are expected to drag on oil prices.

"We expect a pullback (of oil prices) here shortly, similar to what we saw happen in early September," Allyson Cutright, director of the global oil service division at Rapidan Energy Group. "And that's primarily because we don't see the vaccines really impacting demand until the second half of the year."

Rapidan expects Brent to average $45 per barrel for 2021 and West Texas Intermedia at $43. If that looks familiar, that's because it is.

While oil prices collapsed early this year, with U.S. crude even going negative for the first time ever, they later recovered and hovered in the low- to mid-$40-range for much of the year.

But vaccinations are expected to unlock immense pent-up demand across consumer categories next. So what's up with oil prices?

'Fragile' Oil Prices Will Be Left Behind

In its monthly report in December, the International Energy Agency said the oil markets remain "fragile" with kerosene (jet fuel) weighing down demand the most in 2021. Meanwhile, the International Air Transport Association doesn't see airline passenger traffic rebounding to 2019 levels until 2024.

In addition, Rapidan's Cutright expects the U.S. to reenter the Iranian nuclear agreement by the middle of 2021. That would lift sanctions on Iranian crude and bring about 1.8 million barrels of oil per day back to the market.

"So, it's going to be another rough year, though not as bad as 2020," she said.

Oil majors like Exxon Mobil (XOM), Chevron (CVX) and Royal Dutch Shell (RDSA) have already cut workforces and capital spending for 2021 in anticipation of lower for longer oil prices.

But smaller independent producers are having trouble staying afloat as cash flow dries up. So far this year, 45 North American oil and gas producers filed for bankruptcy, representing $53.9 billion in debt, according to Haynes & Boone. That's up from 42 companies in all of 2019, representing $25.8 billion in debt.

Shale Oil Stocks To Consolidate Further

The U.S. shale space consolidated as oil prices didn't rebound enough to support expanded drilling and cash flow.

Analysts in general see WTI of $50 as a key threshold for shale producers to begin pumping more crude again. But if oil prices head back to the lows $40s, expect more mergers in shale as cash-strapped companies grapple with heavy debt loads.

On Dec. 21, Diamondback Energy (FANG) reached a deal to buy QEP Resources (QEP) and privately held Guidon to boost its assets in the prolific Permian Basin.

That's despite Diamondback CEO Travis Stice's insistence in November that the company didn't need to go shopping around for more acreage.

Meanwhile, ConocoPhillips (COP) and Concho Resources (CXO) are merging to create the U.S. largest independent oil company.

Pioneer Natural Resources (PXD) agreed to buy Parsley Energy (PE) to consolidate holdings. Devon Energy (DVN) bought privately held WPX Energy.

Which Oil Stocks Are Next?

M&A is actually down sharply from a year ago, but that's mostly because activity largely froze in the first half of the year after the shock from oil prices.

Buying picked up in the latter half of the year. And shale oil stocks will be on the lookout for other independent producers to boost acreage outside of federal lands, which could come under tougher rules from the Biden administration, or shore up balance sheets.

In a report, PricewaterhouseCoopers said, "opportunity exists for well-capitalized E&P players to acquire quality assets, build on existing drilling inventory, and unlock corporate synergies."

Matador Resources (MTDR) and natural gas-focused Centennial Resource Development (CDEV) are prime takeover targets, according to Phil Flynn, senior market analyst for the Price Futures Group. That's due to their stronger balance sheets vs. some of their peers.

But he warned that oil majors like Exxon Mobil (XOM) and Chevron (CVX) might think twice before going on a buying spree amid a likely tougher regulatory environment under the Biden Administration.

"The normal attraction to these properties that look like a bargain comes with more of a risk," he said.

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