I hope each of you had a happy and safe holiday season despite the ongoing challenges of the pandemic. 2020 was perhaps the most difficult year many of us have faced. While we’re all anxious to put 2020 behind us and there are signs of hope, we aren’t out of the woods yet and I expect the first half of 2021 to continue to be a trying time for our country, economy, and industry.
Looking ahead, here are a few themes I think will play a role in 2021, which are a continuation or evolution of where we’ve been in 2020.
- Resolving the Pandemic is Key to Restoring Oil Demand — Expect oil demand to remain depressed until the pandemic is resolved, economic activity returns to pre-pandemic levels and people are willing/able to travel freely by air and commute to work. 2020 has shown us that many of us are much better able than expected to work remotely, so a small percentage of office workers may never return to the office and others may commute fewer days per week. Nevertheless, I expect that most people will return to their offices more or less full-time later this year. While we’re able to do a lot of work remotely, I expect people to want to get out of their houses and back to a more collaborative office setting. What we learned in 2020 is that social distancing, mask-wearing, etc. works, but people have a hard time sticking with those behaviors for a long time. The pandemic won’t get resolved by those methods, so the timing of oil demand recovery is tied to the roll-out of the vaccines. The good news is that process has started; the bad news is it’s going slowly. We’ll need a much more aggressive, nationwide effort if we’re going to get the level of vaccination we need, and I think that’ll take all of the first half of the year.
- Continued Pressure on Coal Will Increase Natural Gas Demand — I expect continued movement away from coal-fired generation, which will likely be accelerated by increased regulatory pressure from the incoming administration. Natural gas is well-positioned to capture this market share and provide support to prices. My hope is we’ve seen the lowest gas prices for a while.
- Novel Capital Sources Will Continue to Expand — Due to poor results, many small- and mid-sized banks are exiting or have exited the energy-lending business, and the larger banks are under external pressure to reduce lending to the sector. Although I don’t expect the large banks to completely leave the space (it would take several years to do so even if they chose to), I do expect challenges for operators who need to raise capital. I expect we’ll see the continued expansion of non-traditional capital sources/structures, particularly on the debt side. Look for shorter-term, amortizing loans to take the place of traditional RBL facilities and non-banks to invest via debt-type instruments.