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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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Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO)
In its January 2020 Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts that annual U.S. crude oil production will average 11.1 million b/d in 2021, down 0.2 million b/d from 2020 as result of a decline in drilling activity related to low oil prices. A production decline in 2021 would mark the second consecutive year of production declines. Responses to the COVID-19 pandemic led to supply and demand disruptions. EIA expects crude oil production to increase in 2022 by 0.4 million b/d because of increased drilling as prices remain at or near $50 per barrel (b).
The United States set annual natural gas production records in 2018 and 2019, largely because of increased drilling in shale and tight oil formations. The increase in production led to higher volumes of natural gas in storage and a decrease in natural gas prices. In 2020, marketed natural gas production fell by 2% from 2019 levels amid responses to COVID-19. EIA estimates that annual U.S. marketed natural gas production will decline another 2% to average 95.9 billion cubic feet per day (Bcf/d) in 2021. The fall in production will reverse in 2022, when EIA estimates that natural gas production will rise by 2% to 97.6 Bcf/d.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO)
EIA’s forecast for crude oil production is separated into three regions: the Lower 48 states excluding the Federal Gulf of Mexico (GOM) (81% of 2019 crude oil production), the GOM (15%), and Alaska (4%). EIA expects crude oil production in the U.S. Lower 48 states to decline through the first quarter of 2021 and then increase through the rest of the forecast period. As more new wells come online later in 2021, new well production will exceed the decline in legacy wells, driving the increase in overall crude oil production after the first quarter of 2021.
Associated natural gas production from oil-directed wells in the Permian Basin will fall because of lower West Texas Intermediate crude oil prices and reduced drilling activity in the first quarter of 2021. Natural gas production from dry regions such as Appalachia depends on the Henry Hub price. EIA forecasts the Henry Hub price will increase from $2.00 per million British thermal units (MMBtu) in 2020 to $3.01/MMBtu in 2021 and to $3.27/MMBtu in 2022, which will likely prompt an increase in Appalachia's natural gas production. However, natural gas production in Appalachia may be limited by pipeline constraints in 2021 if the Mountain Valley Pipeline (MVP) is delayed. The MVP is scheduled to enter service in late 2021, delivering natural gas from producing regions in northwestern West Virginia to southern Virginia. Natural gas takeaway capacity in the region is quickly filling up since the Atlantic Coast Pipeline was canceled in mid-2020.
Just when it seems that the drama of early December, when the nations of the OPEC+ club squabbled over how to implement and ease their collective supply quotas in 2021, would be repeated, a concession came from the most unlikely quarter of all. Saudi Arabia. OPEC’s swing producer and, especially in recent times, vocal judge, announced that it would voluntarily slash 1 million barrels per day of supply. The move took the oil markets by surprise, sending crude prices soaring but was also very unusual in that it was not even necessary at all.
After a day’s extension to the negotiations, the OPEC+ club had actually already agreed on the path forward for their supply deal through the remainder of Q1 2021. The nations of OPEC+ agreed to ease their overall supply quotas by 75,000 b/d in February and 120,000 b/d in March, bringing the total easing over three months to 695,000 b/d after the UAE spearheaded a revised increase of 500,000 b/d for January. The increases are actually very narrow ones; there were no adjustments for quotas for all OPEC+ members with the exception of Russia and Kazakshtan, who will be able to pump 195,000 additional barrels per day between them. That the increases for February and March were not higher or wider is a reflection of reality: despite Covid-19 vaccinations being rolled out globally, a new and more infectious variant of the coronavirus has started spreading across the world. In fact, there may even be at least of these mutations currently spreading, throwing into question the efficacy of vaccines and triggering new lockdowns. The original schedule of the April 2020 supply deal would have seen OPEC+ adding 2 million b/d of production from January 2021 onwards; the new tranches are far more measured and cognisant of the challenging market.
Then Saudi Arabia decides to shock the market by declaring that the Kingdom would slash an additional million barrels of crude supply above its current quota over February and March post-OPEC+ announcement. Which means that while countries such as Russia, the UAE and Nigeria are working to incrementally increase output, Saudi Arabia is actually subsidising those planned increases by making a massive additional voluntary cut. For a member that threw its weight around last year by unleashing taps to trigger a crude price war with Russia and has been emphasising the need for strict compliant by all members before allowing any collective increases to take place, this is uncharacteristic. Saudi Arabia may be OPEC’s swing producer, but it is certainly not that benevolent. Not least because it is expected to record a massive US$79 billion budget deficit for 2020 as low crude prices eat into the Kingdom’s finances.
So, why is Saudi Arabia doing this?
The last time the Saudis did this was in July 2020, when the severity of the Covid-19 pandemic was at devastating levels and crude prices needed some additional propping up. It succeeded. In January 2021, however, global crude prices are already at the US$50/b level and the market had already cheered the resolution of OPEC+’s positions for the next two months. There was no real urgent need to make voluntary cuts, especially since no other OPEC member would suit especially not the UAE with whom there has been a falling out.
The likeliest reason is leadership. Having failed to convince the rest of the OPEC+ gang to avoid any easing of quotas, Saudi Arabia could be wanting to prove its position by providing a measure of supply security at a time of major price sensitivity due to the Covid-19 resurgence. It will also provide some political ammunition for future negotiations when the group meets in March to decide plans for Q2 2021, turning this magnanimous move into an implicit threat. It could also be the case that Saudi Arabia is planning to pair its voluntary cut with field maintenance works, which would be a nice parallel to the usual refinery maintenance season in Asia where crude demand typically falls by 10-20% as units shut for routine inspections.
It could also be a projection of soft power. After isolating Qatar physically and economically since 2017 over accusations of terrorism support and proximity to Iran, four Middle Eastern states – Saudi Arabia, Bahrain, the UAE and Egypt – have agreed to restore and normalise ties with the peninsula. While acknowledging that a ‘trust deficit’ still remained, the accord avoids the awkward workarounds put in place to deal with the boycott and provides for road for cooperation ahead of a change on guard in the White House. Perhaps Qatar is even thinking of re-joining OPEC? As Saudi Arabia flexes its geopolitical muscle, it does need to pick its battles and re-assert its position. Showcasing political leadership as the world’s crude swing producer is as good a way of demonstrating that as any, even if it is planning to claim dues in the future.
It worked. It has successfully changed the market narrative from inter-OPEC+ squabbling to a more stabilised crude market. Saudi Arabia’s patience in prolonging this benevolent role is unknown, but for now, it has achieved what it wanted to achieve: return visibility to the Kingdom as the global oil leader, and having crude oil prices rise by nearly 10%.
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