Demand has been the most important element in crude oil markets the past year, due to uncertainty surrounding the COVID-19 coronavirus. That is changing. With the virus likely subsiding, crude oil demand is increasingly predictable: we expect domestic and international demand to continue to increase through 2021. Oil prices in 2021 will largely be driven by supply side movements.

In this article, we discuss three potential scenarios for oil markets in 2021: Sharp Rise; Price War Redux; and Drifting Upwards. We’ll discuss each case in detail, but believe that the latter scenario is most likely: crude prices are likely to rise somewhat – but not surge – on strongly rebounding demand and firming supply. Still, we acknowledge that crude supply could surprise in either direction.

Demand assumption: strong, with more upside risks than downsides

Energy markets remain largely if not totally driven by COVID dynamics, which are now largely determined by the pace of vaccine rollouts. U.S. vaccinations are moving at a quicker pace as Moderna/Pfizer manufacturing picks up and the Johnson & Johnson/Novavax vaccines appear set for approval. Most importantly, a growing body of evidence suggests that vaccines sharply reduce the probability of severe disease and disease transmission. In other words, the vaccines protect the recipient and those around them. This is extremely good news: COVID cases, hospitalizations, and deaths will likely fall dramatically by May.

Policy measures are also highly likely to drive energy demand higher in 2021. The Federal Reserve is supporting expansion and sees little inflation risk, at least for now, while a $1.9 trillion stimulus package could lead to new consumer spending, state and local government spending, business investment – and demand for crude and crude products. An infrastructure bill scheduled for later this year could have even larger implications for immediate and future energy demand.

There are some potential downsides. The CDC issued new guidance saying that vaccine protections can wear off after only three months. We believe that guidance is perhaps unduly cautious. Nevertheless, if vaccines provide only short-duration immunity then the United States and other countries will have an extraordinarily difficult time returning to normalcy. Most dangerously, a new COVID variant could defeat existing vaccines. Despite these dangers, we remain broadly confident that the U.S. will defeat COVID through vaccines, and that the U.S. economy will surge this year.