EIA: Global trade slowdown presents downside risks to oil consumption

April 16, 2018
Global oil consumption will rise by 1.8 million b/d in both 2018 and 2019, according to the US Energy Information Administration’s latest Short-Term Energy Outlook.

Global oil consumption will rise by 1.8 million b/d in both 2018 and 2019, according to the US Energy Information Administration’s latest Short-Term Energy Outlook. And although the forecast was revised higher from EIA’s previous STEO, which pegged a 1.7 million-b/d rise for both 2018 and 2019, a slowdown in global trade could affect oil demand and presents downside risks to worldwide oil consumption, EIA said.

This reflects the fact that both the US and China announced potential tariffs on several billion dollars’ worth of each other’s goods in March.

Meantime, continuing draws in US and global oil inventories as well as actual and potential supply disruptions put upward pressure on crude oil prices in the past month, when Brent crude oil spot prices averaged $66/bbl.

Economic and political instability in Venezuela continues to affect its crude oil production. EIA estimates Venezuelan crude oil production averaged 1.5 million b/d in March, a decline of about 24% year-over-year.

In addition, whether the US will extend the Joint Comprehensive Plan of Action (JCPOA) remains uncertain. Without an extension, it could lead to the reinstitution of sanctions on Iran, which could affect Iran’s oil production and exports.

Also, commercial crude oil inventories in the US fell lower than the previous 5-year average for the week ending Mar. 18, the first time since 2014 that inventories were lower than the 5-year average.

EIA forecasts Brent spot prices will average about $63/bbl in both 2018 and 2019. EIA expects West Texas Intermediate crude oil prices to average $4/bbl lower than Brent prices in both 2018 and 2019.

US crude oil production

EIA estimates that US crude oil production averaged 10.4 million b/d in March, up 260,000 b/d from the February level. Total US crude oil production averaged 9.3 million b/d in 2017. EIA projects that US crude oil production will average 10.7 million b/d in 2018, which would mark the highest annual average US crude oil production level, surpassing the previous record of 9.6 million b/d set in 1970. EIA forecasts that 2019 crude oil production will again increase, averaging 11.4 million b/d.

Meantime, due to pipeline constraints faced production in the Permian region of Texas and New Mexico, the discount of WTI Midland crude oil prices to Magellan East Houston crude oil prices is widening. New pipelines and expansions are not expected to be completed until mid-2019, which could lead to further price volatility of Midland crude oil.

According to the STEO, thanks to the corporate income tax law enacted at yearend 2017, a group of 46 US oil exploration and production companies collectively claimed $7 billion in tax benefits in fourth-quarter 2017. In addition to the lower corporate income tax rate, US companies are also allowed to accelerate the depreciation of capital investments made through 2023. “The two factors could contribute to an increase in investment in upstream production,” EIA said.

Summer fuels outlook

EIA forecasts retail prices for regular-grade gasoline to average $2.74/gal during the summer of 2018, which tops last summer’s average by 32¢. The forecast attributes this increase, in large part, to higher Brent crude oil prices, which are reaching average spot prices not approached since 2014.

Increased prices throughout 2018 will likely increase annual US household spending on motor gasoline by about $190, about 9% higher compared with 2017. This increase would mark the second consecutive year that consumers experience higher motor fuel-related expenses, following annual declines from 2014 to 2016.

Despite higher prices, EIA’s forecast expects gasoline consumption to increase in 2018. Americans are set to consume roughly 9.6 million b/d throughout the summer of 2018, which would be an increase of about 20,000 b/d from last summer’s record average.

Natural gas

US dry natural gas production averaged 73.6 bcfd in 2017, according to EIA data. EIA forecasts dry gas production will average 81.1 bcfd in 2018, establishing a new record. EIA expects gas production will rise by 1.7 bcf/d in 2019.

Rising US gas production is expected to support both growing domestic consumption and increasing gas exports in the forecast. EIA forecasts US consumption of gas to increase 5.7% in 2018 and 0.9% in 2019, with electric power generation the leading contributor to this increase.

EIA also expects net gas exports to increase from 0.4 bcfd in 2017 to an annual average of 2.2 bcfd in 2018 and 4.4 bcfd in 2019.

EIA estimates that gas inventories ended March—typically considered the end of the winter heating season—at almost 1.4 tcf, which was 19% lower than the previous 5-year average. Based on a forecast of rising production, EIA forecasts that gas inventories will increase by more than the 5-year average rate of growth during the injection season (April–October) to reach almost 3.8 tcf on Oct. 31, which would be 2% lower than the previous 5-year average.

EIA expects Henry Hub gas spot prices to average $2.99/MMbtu in 2018 and $3.07/MMbtu in 2019.