The US Energy Information Administration, in its latest Short-Term Energy Outlook, forecasts Brent crude spot prices will average $64/bbl in this year’s second half and $65/bbl in 2020. The forecast of stable crude oil prices reflects EIA’s expectations of a relatively balanced global oil market amid the combination of risks for oil-supply disruptions and lower expectations for economic growth.
EIA forecasts global oil inventories will increase by 100,000 b/d this year and 300,000 b/d in 2020.
EIA expects West Texas Intermediate crude oil prices will average $5.50/bbl less than Brent prices during this year’s fourth quarter and in 2020, narrowing from the $6.60/bbl spread during July. The narrowing spread reflects EIA’s assumption that crude oil pipeline transportation constraints from the Permian basin to the Gulf Coast will ease in the coming months.
However, this updated differential forecast is wider than the $4/bbl spread forecast made in last month’s report, as EIA revised its assumptions about the marginal cost of moving crude oil via pipeline from Cushing to the Gulf Coast.
Global oil market
Brent crude oil spot prices averaged $64/bbl in July, almost unchanged from the average in June but $10/bbl lower than the price in July 2018. Brent and WTI prices on Aug. 1 declined by more than 7% on the day following the US announcement of new tariffs on China, which was a substantial single-day decline.
Brent crude oil prices in July traded in a $6.36/bbl range—the second-narrowest range during any month in the past year. The narrow trading range in July occurred amid offsetting upward and downward oil price pressures.
Continued Middle East tensions presented risks of supply disruptions and higher crude oil prices. Iran seized a British tanker in the Strait of Hormuz in late July, but crude oil transit in the region has not been markedly disrupted to date.
Meanwhile, continued demand-side concerns have generally added downward price pressure to crude oil prices. The International Monetary Fund recently lowered its estimates for global economic growth in 2019 and 2020. In addition, China’s gross domestic product growth for this year’s second quarter was 6.2%—the lowest growth rate for any quarter since estimates began in 1992. The July manufacturing Purchasing Managers’ Index for the Eurozone, China, and Japan all indicated contraction in manufacturing activity as well.
EIA expects Brent prices to increase to $65/bbl by this year’s fourth quarter and remain there throughout 2020. EIA’s flat crude oil price forecast recognizes that upside and downside price risks and EIA’s forecast for global oil inventory growth are currently balanced.
However, given the uncertainty in the risk factors discussed, prices could break out of the mid-$60/bbl range if the supply or demand concerns materialize in the coming months. Although Brent crude oil prices stayed within a relatively narrow trading range in July, Brent’s implied volatility increased in the middle of the month before declining when the September contract expired. Higher implied volatility could reflect increased uncertainty among market participants about the future direction of oil prices.
US crude oil
EIA estimates that US crude oil production averaged 11.7 million b/d in July, down by 300,000 b/d from its level in June. The declines were mostly in the federal Gulf of Mexico, where operators shut platforms for several days in mid-July because of Hurricane Barry. EIA estimates that gulf crude oil production fell by more than 300,000 b/d in July. Those declines were partially offset by the production growth of more than 100,000 b/d in the Lower 48 onshore region.
EIA expects monthly growth in Lower 48 onshore production to slow during the rest of the forecast period, averaging 50,000 b/d/month from this year’s fourth quarter through yearend 2020, down from an average of 110,000 b/d/month from August 2018 through last month. EIA forecasts US crude oil production will average 12.3 million b/d this year and 13.3 million b/d in 2020, both of which would be record levels.
US natural gas
EIA forecasts natural gas spot prices at Henry Hub to average $2.36/MMbtu in this year’s second half, which is 14¢ lower than expected in the July STEO. This downside revision reflects the recent price movement and EIA’s forecast of continued strong growth in gas production.
EIA forecasts that US dry gas production will average 91 bcfd this year, up 7.6 bcfd from 2018. EIA expects monthly average gas production to increase late this year and then decline slightly during first-quarter 2020 as the lagged effect of low prices in this year’s second half reduces gas-directed drilling. However, EIA forecasts that growth will resume in second-quarter 2020, and gas production in 2020 will average 92.5 bcfd.
EIA estimates that gas inventories ended July at 2.7 tcf, 13% higher than levels from a year earlier and 4% lower than the 5-year (2014–18) average. EIA forecasts that gas storage injections during the April-October injection season will outpace the previous 5-year average and that inventories will rise to more than 3.7 tcf at the end of October, which would be 16% higher than October 2018 levels and slightly above to the 5-year average.
