The faster recovery of global oil demand and steeper declines in global oil production are bringing markets closer to balance sooner than the forecasts a month ago, the US Energy Information Administration said in its June Short-Term Energy Outlook.
The front-month futures price for Brent crude oil settled at $39.99/bbl on June 4, 2020, an increase of $13.55/bbl from May 1, 2020. The front-month futures price for West Texas Intermediate (WTI) crude oil for delivery at Cushing, Okla., increased by $17.63/bbl during the same period, settling at $37.41/bbl on June 4.
“Several factors likely provided support to crude oil prices. Initial oil consumption data and additional efforts by major oil producers indicate that the oversupply in global oil markets has not been as severe as EIA had forecast in the May STEO. As US states and countries in the Organization of Economic Cooperation and Development (OECD) began to reopen from lockdown, early indicators of petroleum consumption have shown increases from the low April levels,” EIA said.
EIA estimates that the global consumption of petroleum and other liquid fuels averaged 82.9 million b/d in May, up 3.7 million b/d from April consumption and 2.9 million b/d more than forecast in the May STEO.
In addition, global oil production has been declining as a result of voluntary production cuts from members of the Organization of the Petroleum Exporting Countries and partner countries (OPEC+), as well as from rapid declines in tight oil production in the US.
EIA’s estimate of global liquid fuels supply in May is 500,000 b/d lower than forecast in last month’s STEO. In addition to OPEC+’s initial production cuts—totaling 9.7 million b/d—Saudi Arabia, Kuwait, and UAE announced additional reductions of about 1.2 million b/d for June 2020 beyond their initial commitments. Partly based on these cuts, EIA has revised down the forecast for supply of petroleum liquids globally during June by 2.2 million b/d compared with last month’s forecast.
EIA completed this forecast before OPEC+ announced on June 6 that it would extend production cuts from May and June through July. Leading up to this decision, talks of extended production management contributed to higher crude oil prices. This STEO does not reflect an extension of the May and June cuts.
EIA now expects monthly Brent prices will average $37/bbl during the second half of 2020 and rise to an average of $48/bbl in 2021.
The forecast of rising crude oil prices reflects expected declines in global oil inventories during the second half of 2020 and through 2021. EIA expects high inventory levels and spare crude oil production capacity will limit upward price pressures in the coming months, but as inventories decline into 2021, those upward price pressures will increase.
Global oil demand, supply
EIA forecasts that demand for global petroleum and liquid fuels will average 83.8 million b/d in the second quarter of 2020, 16.6 million b/d lower than at the same time last year. Lower demand is the result of COVID-19-related shutdowns throughout much of the world.
As stay-at-home orders are eased, EIA expects liquid fuels consumption will rise to an average of 94.9 million b/d in the third quarter (down 6.7 million b/d year over year). EIA forecasts that consumption of petroleum and liquid fuels globally will average 92.5 million b/d for all of 2020, down 8.3 million b/d from 2019, before increasing by 7.2 million b/d in 2021.
EIA expects the supply of liquid fuels globally will average 92.6 million b/d in the second quarter of 2020, down 7.9 million b/d year-over-year. The declines reflect voluntary supply cuts by OPEC+ and reductions in drilling activity in the US because of low oil prices.
Supply of oil fell by less than demand in the second quarter, and EIA expects supply to be slower to increase. In the forecast, the global supply of oil declines to 92.0 million b/d in the third quarter of 2020 before rising to an annual average of 97.4 million b/d in 2021. EIA expects OPEC to drive supply growth in 2021.
EIA expects that global liquid fuels inventories will grow by an average of 2.2 million b/d in 2020. According to EIA estimates, inventories rose from January through May at an average rate of 9.4 million b/d. The builds, which peaked during April, were the result of a sharp decline in global oil demand because of widespread travel limitations and reduced economic activity.
EIA estimates that global oil inventories at the end of May stood 1.4 billion bbl higher than they were at the end of 2019. However, EIA now expects global oil inventories will begin declining in June, a month earlier than previously forecast, with draws continuing through the end of 2021. The sooner-than-expected draws are the result of sharper declines in global oil production during June and higher global oil demand than previously expected.
EIA expects global liquid fuels inventories will fall at an average rate of 2.5 million b/d from June 2020 through the end of 2021.
US oil market
EIA forecasts US liquid fuels consumption will average 15.7 million b/d in the second quarter of 2020, down 4.6 million b/d (23%) from the same period in 2019. The decline reflects travel restrictions and reduced economic activity related to COVID-19 mitigation efforts.
EIA expects the largest declines in US oil consumption have already occurred and demand will generally rise during the next 18 months. EIA forecasts US liquid fuels consumption will average 18.4 million b/d in the third quarter of 2020 (down 2.3 million b/d year-over-year) before rising to an average of 19.5 million b/d in 2021. Although that level would be 1.4 million b/d more than EIA’s forecast 2020 consumption, it would be 1.0 million b/d less than the 2019 average.
Declines in US liquid fuels consumption vary across products. EIA expects jet fuel consumption to fall by 64% year-over-year in the second quarter of 2020, while gasoline consumption falls by 26% and distillate consumption falls by 17%. EIA forecasts the consumption of all three fuels to rise in the third quarter and into 2021 but to remain lower than 2019 levels.
EIA estimates US crude oil production fell from a record 12.9 million b/d in November 2019 to 11.4 million b/d in May 2020 as Baker Hughes reported the fewest active US drilling rigs on record. Baker Hughes began keeping records in 1987.
US crude oil production is expected to continue to decline, to 10.6 million b/d in March 2021, then increase slightly through the end of 2021. EIA forecasts that US crude oil production will average 11.6 million b/d in 2020, down 700,000 b/d from 2019. This 2020 production decline would mark the first annual decline since 2016. In 2021, EIA expects US crude oil production will average 10.8 million b/d.
US natural gas
In May, the Henry Hub natural gas spot price averaged $1.75/MMbtu. EIA forecasts that relatively low natural gas demand will keep spot prices lower than $2/MMbtu through August.
However, EIA expects prices will generally rise through the end of 2021. EIA expects that natural gas price increases will be sharpest this fall and winter when they rise from an average of $2.06/MMbtu in September to $3.08/MMbtu in January.
Despite EIA’s forecast of record end-of-October storage levels, EIA expects that rising demand heading into winter, combined with reduced production, will cause upward price pressures. EIA forecasts that Henry Hub natural gas spot prices will average $2.04/MMbtu in 2020 and $3.08/MMbtu in 2021.
EIA expects that total US consumption of natural gas will average 81.9 bcfd in 2020, down 3.6% from 2019. The decline primarily reflects less consumption in the industrial sector, which EIA forecasts will average 21.0 bcfd in 2020, down 8.7% from 2019 as a result of reduced manufacturing activity.
US dry natural gas production set an annual record in 2019, averaging 92.2 bcfd. EIA forecasts dry natural gas production will average 89.7 bcfd in 2020, with monthly production falling from 96.2 bcfd in November 2019 to 83.6 bcfd in March 2021, before increasing slightly.
Natural gas production declines the most in the Appalachian and Permian regions. In the Appalachian region, low natural gas prices are discouraging producers from engaging in natural gas-directed drilling, and in the Permian region, low crude oil prices reduce associated natural gas output from oil-directed wells.
In 2021, EIA’s forecast production of dry natural gas in the US averages 85.4 bcfd. EIA expects production to begin rising in the second quarter of 2021 in response to higher prices.
Total US working natural gas in storage ended May at almost 2.8 tcf, 18% more than the 5-year (2015-19) average. In the forecast, inventories rise by 2.1 tcf during the April-through-October injection season to reach more than 4.1 tcf on Oct. 31, which would be a record.
EIA forecasts that US LNG exports will average 5.6 bcfd in the second quarter of 2020 and 3.7 bcfd in the third quarter of 2020. EIA expects that US LNG exports will decline through the end of summer.
