Oil Markets and Prices in 2021: Demand, Supply, and Policy Uncertainties


Oil Markets and Prices in 2021: Demand,
Supply, and Policy Uncertainties

January 13, 2021
Oil markets began 2021 following one of the most disruptive years on record. In the first half of 2020,
Coronavirus Disease 2019 (COVID-19) pandemic-related demand suppression for oil-derived products
(e.g., gasoline, diesel fuel, and aviation fuel) created historically large market imbalances. Petroleum
inventories held in commercial storage increased quickly as product prices declined, refining profitability
decreased, and
crude oil demand collapsed. Oil prices fell rapidly and West Texas Intermediate (WTI)
futures settled negative
for the first time. Federal policy makers evaluated options to provide financial
relief for U.S. oil producers, including exercise of Strategic Petroleum Reserve (SPR) authorities and
royalty relief. Nevertheless, companies filed for bankruptcy protection, decreased asset values, and some
U.S. refineries announced plans to either close or convert operations to produce renewable fuels. Oil
prices began to recover following implementation of a production restraint agreement among the
Organization of the Petroleum Exporting Countries (OPEC) and certain non-OPEC countries (collectively
OPEC+), combined with economically motivated production declines in the United States, Canada, and
other nations.
Relative market stability generally describes the second half of 2020. Petroleum product consumption
increased. OPEC+ group-level compliance was near 100%. Implied demand/supply balances indicated an
undersupplied market. Commercial inventories declined. WTI oil prices were mostly at or near $40 per
barrel, but closed out 2020 at $48.52. Indicators suggest a recovering oil market with potential for higher,
yet moderate, prices in the short term. However, demand, supply, and uncertainties in U.S. policy toward
Iran could change 2021 market and price conditions.
Demand and Supply Uncertainties
Multiple factors can affect oil demand and supply, and relatively small imbalances can translate into large
price movements. Demand uncertainty in 2021 is at heightened levels as countries continue pandemic
management efforts. Successful deployment and effectiveness of a COVID-19 vaccine could materially
increase economic activity and petroleum product demand, especially for aviation fuel. Other demand
uncertainties include (1) general economic conditions and growth, a primary oil demand factor, and (2)
pandemic-related structural/societal mobility and work changes (e.g., lower public transportation usage
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and increased telework). Current projections indicate that petroleum consumption in 2021 may not return
to pre-pandemic levels.
Supply uncertainty in 2021 is also elevated. Some notable uncertainties include:
Libya: Oil production in Libya—volatile since 2011 due to internal conflict—increased
by nearly one million barrels per day following a United Nations-mediated peace
agreement. Liby
an officials have indicated plans to further increase production in 2021.
Whether stable Libyan production will be sustained is unclear.
OPEC+ agreement compliance: Ongoing compliance with, and potential adjustments to,
the OPEC+ agreement—effective through April 2022—could affect market balances and
prices. The group’s monitoring committee will convene monthly to assess market
Additionally, U.S. policy regarding economic sanctions imposed on Iran is a source of supply uncertainty
in 2021 that could influence markets and prices.
U.S. Economic Sanctions Policy: Iran Oil Exports
The United States has active sanctions regimes affecting three major oil-producing countries: Iran,
Russia, and Venezuela.
Iran sanctions affect Iran’s entire oil sector, including finance and investment,
shipping, trade, and insurance. Oil export sanctions imposed on Iran generally aim to discourage buyers
from purchasing Iranian oil, thereby reducing export revenues, by sanctioning financial institutions that
transact with Iranian banks and entities that purchase Iran’s petroleum or petrochemical products. The oil
export sanctions framework includes wind-down periods for market adjustments and requires oil market
assessments and outreach to producing countries when applied.
Sanctions have materially affected Iran’s oil production and exports (see Figure 1). Production volumes
declined by approximately 50% following the Trump Administration’s exit of the Joint Comprehensive
Plan of Action (JCPOA). President-elect Biden has indicated intent to pursue diplomacy with Iran and
rejoin the JCPOA, if Iran returns to full compliance with the agreement. Iranian President Rouhani has
instructed Iran’s Oil Ministry to prepare for crude oil production and exports at full capacity by March
2021. The framework does not include adjustment periods, market assessments, and producing country
outreach, should sanctions affecting the energy sector be either eased or removed.

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Figure 1. Iran Oil Production, Observable Exports, and Selected Sanction Events
January 2011-December 2020

Source: Crude oil production data from Bloomberg L.P. Export data from January 2011 through June 2015 from the
International Energy Agency. Export data from July 2015 through December 2020 from Bloomberg L.P.
Notes: For additional background of sanction events, oil production, and exports referenced, see CRS Report R46213, Oil
Market Effects from U.S. Economic Sanctions: Iran, Russia, Venezuela
by Phil ip Brown.
Condensate is a light liquid hydrocarbon co-produced with oil and natural gas.
Export data from Bloomberg reflect “observable” volumes obtained from a vessel’s automatic identification system (AIS)
transponder. Fol owing the U.S. JCPOA exit, Iranian oil tankers often disable AIS transponders. Actual Iranian export
volumes could be higher.
FY2012 NDAA = National Defense Authorization Act for Fiscal Year 2012 (P.L. 112-81); E.O. = executive order; JPA =
Joint Plan of Action (interim agreement); bpd = barrels per day; JCPOA = Joint Comprehensive Plan of Action; SRE =
Significant Reduction Exception.
Iran’s potential return to pre-sanctions output could increase supply by as much as two million barrels per
day (approximately 2% of global petroleum supply), volumes that could noticeably affect markets. Iran,
an OPEC member, is exempt from the OPEC+ production agreement. Should the Biden Administration
move to ease sanctions, timing and volumes of additional Iranian supply could depend on the
administrative mechanism employed (i.e., enforcement relaxation, significant reduction exceptions, or
compliance verification and administrative waivers). Additional Iranian barrels would put downward
pressure on oil prices, although actual price effects would depend on other market variables as well.
Numerous uncertainties affect oil and petroleum price forecasts for 2021. Current forecasts indicate
moderate and stable oil prices with commercial inventories, additional supply, and high OPEC spare
production capacity
expected to limit price increases. However, unforeseen geopolitical, market
disruption, and policy events could quickly change the 2021 outlook. Longer term, federal-level
environment, carbon, trade, efficiency, and climate policies—should they be enacted—could also affect
oil markets and prices.

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Author Information

Phillip Brown

Specialist in Energy Policy

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