In its May Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects Brent crude oil prices will average $34 per barrel (b) in 2020 and $48/b in 2021. Although market outlooks are subject to many risks, the May STEO remains subject to heightened levels of uncertainty because the effects on energy markets of mitigation efforts related to the 2019 novel coronavirus disease (COVID-19) are still evolving. Despite the April agreement between the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) to reduce production levels through the end of 2022, crude oil prices have remained at some of their lowest levels in more than 20 years. EIA expects that global liquid fuels inventories will grow by an average of 2.6 million barrels per day (b/d) in 2020 after falling by about 0.2 million b/d in 2019. EIA expects global inventory builds will be largest in the first half of 2020, rising at a rate of 6.6 million b/d in the first quarter and increasing to builds of 11.5 million b/d in the second quarter because of widespread travel limitations and sharp reductions in economic activity. After the first half of 2020, EIA expects global consumption to increase, leading to inventory draws for at least six consecutive quarters and putting upward pressure on crude oil prices (Figure 1).
As with the March and April STEO forecasts, EIA analyzed reductions in global oil demand by evaluating three main drivers: lower economic growth, less air travel, and other declines in demand not captured by these two categories, largely related to reductions in travel because of stay-at-home orders. Based on incoming economic data and updated assessments of lockdowns and stay-at-home orders across dozens of countries, EIA has lowered its forecasts for global oil demand in 2020. EIA forecasts global liquid fuels consumption will average 92.6 million b/d in 2020, down 8.1 million b/d from 2019. EIA forecasts both economic growth and global consumption of liquid fuels to increase in 2021. Any lasting behavioral changes to patterns of transportation and other forms of oil consumption once COVID-19 mitigation efforts end, however, present considerable uncertainty to the increase in consumption of liquid fuels, even if gross domestic product (GDP) growth increases significantly.
OPEC+ agreed to new production cuts in early April that will remain in place throughout the forecast period. EIA assumes OPEC members will mostly adhere to announced cuts during the first two months of the agreement (May and June) and that production compliance will relax later in the forecast period as stated production cuts are reduced and global oil demand begins growing. EIA forecasts OPEC crude oil production will fall below 24.1 million b/d in June, a 6.3 million b/d decline from April, when OPEC production increased following an inconclusive meeting in March. If OPEC production declines to less than 24.1 million b/d, it would be the group’s lowest level of production since March 1995. The forecast for June OPEC production does not account for the additional voluntary cuts announced by Saudi Arabia’s Energy Ministry on May 11.
EIA expects OPEC production will begin increasing in July 2020 in response to rising global oil demand and prices. From that point, EIA expects a gradual increase in OPEC crude oil production through the remainder of the forecast, and EIA expects production to rise to an average of 28.5 million b/d during the second half of 2021.
EIA forecasts the supply of non-OPEC petroleum and other liquid fuels will decline by 2.4 million b/d in 2020 compared with 2019. The steep decline reflects lower forecast oil prices in the second quarter, as well as the newly implemented production cuts from non-OPEC participants in the OPEC+ agreement. EIA expects the largest production declines in 2020 to occur in Russia, the United States, and Canada.
In 2021, EIA expects production of non-OPEC petroleum and other liquid fuels to increase. Production in countries that have implemented voluntary production cuts will generally rise in 2021 as global oil demand recovers. However, EIA forecasts production to continue to decline in the United States, where production is driven by price-sensitive shale operators.
EIA expects the steepest declines in U.S. crude oil production will be in the second quarter of 2020; during those three months, EIA forecasts monthly declines to average 0.5 million b/d. EIA expects production to continue declining, albeit at a slower rate, through March 2021, when production bottoms out at 10.7 million b/d, which would be 2.1 million b/d lower than the record monthly production reached in November 2019. EIA expects production to rise modestly through the end of 2021 in response to rising crude oil prices. EIA forecasts annual average crude oil production to be 11.7 million b/d in 2020 and 10.9 million b/d in 2021.
The decline in U.S. crude oil production in 2020 and 2021, combined with rising U.S. liquid fuels consumption, results in the United States again importing more crude oil and petroleum products in the third quarter of 2020 than it exports, and remaining a net importer in most months through the end of the forecast period.
U.S. average regular gasoline price rises, diesel price falls
The U.S. average regular gasoline retail price rose more than 6 cents per gallon from the previous week to $1.85 per gallon on May 11, $1.02 lower than the same time last year. The Midwest price rose nearly 18 cents to $1.75 per gallon, the East Coast price rose more than 2 cents to $1.82 per gallon, and the West Coast and Gulf Coast prices each rose more than 1 cent to $2.45 per gallon and $1.50 per gallon, respectively. The Rocky Mountain price fell nearly 1 cent to $1.76 per gallon.
The U.S. average diesel fuel price fell nearly 1 cent to $2.39 per gallon on May 11, 77 cents lower than a year ago. The Rocky Mountain price fell more than 2 cents to $2.35 per gallon, the East Coast price fell more than 1 cent to $2.50 per gallon, and the Midwest price fell nearly 1 cent to $2.24 per gallon. The Gulf Coast price rose nearly 1 cent to $2.18 per gallon, and the West Coast price rose less than 1 cent to $2.90 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 2.2 million barrels last week to 61.6 million barrels as of May 8, 2020, 8.2 million barrels (15.3%) greater than the five-year (2015-19) average inventory levels for this same time of year. Midwest inventories increased by 1.0 million barrels, East Coast inventories increased by 0.8 million barrels, and Gulf Coast and Rocky Mountain/West Coast inventories each increased by 0.2 million barrels.
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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.
Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.
Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.
This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.
But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.
In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.
But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.
Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.
Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.
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