Gradual improvements in the global oil and gas (O&G) sector’s performance next year will be driven by higher average prices, even though demand is unlikely to fully recover in 2021, Fitch Ratings says. A quicker-than-expected energy transition could disrupt the sector. Most major oil companies are targeting steady emissions reduction and decarbonisation.

We expect a moderate increase in average O&G prices in 2021, coupled with continued spending discipline, to support a gradual recovery in oil companies’ financial performance. OPEC+ will continue to make timely changes to supply, which should reduce oil price volatility, even though demand is unlikely to fully recover by year-end. As a result, we expect leverage of about 70% of issuers in our global O&G portfolio to decline in 2021 compared with 2020.

We assume that the low-carbon energy transition will be steady and not cause substantial disruptions to the sector in the medium term. However, acceleration in decarbonisation as a result of stricter regulation or technological advances could weigh on oil prices and put some ratings under pressure. US president-elect Biden’s environmental policies/a> could be among the main factors influencing the global environmental agenda.

The major European oil companies have been responding to this trend by adopting reduction targets for carbon intensity and emissions. We expect that hydrocarbons will continue to dominate in the majors’ operating cash flow until at least 2030, but the share of capex designated for low-carbon projects, such as wind and solar generation, biofuels, hydrogen and carbon capture, utilisation and storage solutions, will significantly increase. The majors could also accelerate integration into the renewables sector through large-scale acquisitions.