At the beginning of each year, I make several predictions about the energy sector. You can see those predictions and read the context at Energy Sector Predictions For 2021.
There is still a little over a week left in 2021, but I believe there is enough available information to gauge the accuracy of these predictions.
As always, I provided predictions that were specific and measurable. Following each prediction, I discuss what actually happened in 2021, and conclude whether the prediction was right or wrong.
1. The average price of WTI in 2021 will be between $50/bbl and $55/bbl.
Oil prices are notoriously difficult to predict in the best of circumstances due to the unpredictability of OPEC. It’s a more complex relationship than simple supply and demand, because you have to try to factor in what OPEC might do.
Add in the Covid-19 pandemic and subsequent recovery, and we have seen an extreme roller coaster of oil prices over the past two years. At the beginning of the year, I said that if there was a resurgence of the pandemic and new travel restrictions, that could send the price of oil tumbling.
The year opened with the price of West Texas Intermediate (WTI) below $50/bbl. However, I expected it to rise as the economy continued to recover from the pandemic.
Demand recovered strongly, but the problem was that supply didn’t recover as strongly. So the oil market developed an imbalance, and prices went well above my prediction.
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Through December 13, data from the Energy Information Administration (EIA) shows that the average spot price for WTI in 2021 has been $67.86. However, the price briefly exceeded $85 this year, and is presently still above $70.
I thought oil prices would rise, and that was correct. I just didn’t expect them to rise as much as they did. This prediction was wrong.
2. Total U.S. oil production will decline for the second straight year.
Because of the Covid-19 pandemic, U.S. oil production plummeted in the second half of 2020. Production in 2019 had averaged 12.2 million barrels per day (BPD), but that tumbled to 11.3 million BPD in 2020.
U.S. production has been on the rise in recent months in response to higher oil prices. Data from the EIA shows that oil production has risen for three straight months, and is presently at 11.6 million BPD. However, eight of twelve months this year recorded production below last year’s average, so annual production will indeed be lower this year at approximately 11.1 million BPD.
This prediction was accurate.
3. The average natural gas price will be at least 25% higher than it was in 2020.
The average Henry Hub natural gas spot price for 2020 was $2.03/MMBtu, which was the lowest annual average since the EIA began tracking that data in 1997.
Falling oil production means a decline in natural gas supplies that are associated with that oil production. That tightens up supplies, which was a factor in the subsequent recovery of natural gas prices in late 2020. I predicted that prices would be at least 25% higher — averaging above $2.50/MMBtu — in 2021.
Through November, EIA data shows the average Henry Hub price of natural gas was $3.92/MMBtu.
This prediction was accurate, but too conservative in hindsight.
4. U.S. oil imports will increase in 2021.
I based this prediction on my expectation of a recovery in oil demand, but not a complete recovery in supply. That means that imports would have to fill the shortfall.
That turned out to be the case. U.S. imports of crude oil and finished products like gasoline averaged 7.9 million BPD in 2020. This year that average has jumped to 8.5 million BPD, after rising as high as 9.3 million BPD in June.
This prediction was accurate (and is still accurate if we restrict the view to crude oil imports only).
5. ConocoPhillips will have a total return of at least 30%.
I generally like to close with a prediction on ConocoPhillips, which is the world’s largest publicly traded, pure oil and gas producer.
In 2020 I predicted it would return 20% on the year. The company was positioned to have a good year before the pandemic caused oil demand to collapse. So I missed the mark in 2020.
But I still felt like the company was well-positioned to profit based on my expectation of higher oil prices. So I doubled down and raised my prediction to a 30% return for 2021.
Again, that turned out to be a conservative prediction. The company’s significant exposure to natural gas was icing on the cake as prices skyrocketed higher. Year-to-date, ConocoPhillips shares are up 79%.
I got four out of five right this year, but I was too conservative on some that I did get right. But I was also directionally correct on the one prediction I missed. I would give myself maybe a B on this year’s predictions.
As always, I will provide new predictions in early January.