EIA: Recent oil prices supported by better economic data, further OPEC cut
Brent crude oil spot prices averaged $63/bbl in November, up $3/bbl from October. According to the US Energy Information Administration’s latest Short-Term Energy Outlook, the increase in crude oil prices over the past month likely reflected modest upward pressures from both demand-side factors and supply-side factors.
On the demand side, economic data from the world’s two largest economies—US and China—reduced market perceptions of an upcoming slowdown in economic activity.
The US Bureau of Economic Analysis released its second estimate of third-quarter 2019 gross domestic product (GDP). This estimate indicated that real US GDP increased at an annual rate of 2.1% in the third quarter, a faster rate than previously estimated and an increase from growth of 2.0% in the second quarter. For China, the Caixin/Markit manufacturing purchasing managers’ index (PMI) for November was 51.8, up from 51.7 in October and the highest level since 2016.
Concurrently, the S&P 500 equity index closed at a record 3,153.6 on November 27—the day the US GDP estimate was released—an increase of 2.8% from the beginning of the month. The S&P 500 subsequently declined in late November and early December as trade tensions between US and China were back in news headlines. Overall, the S&P 500 index was up 2.4% in November.
On the supply side, markets adjusted expectations ahead of the Dec. 6 meeting between the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. Expectations that OPEC and its partners would extend or possibly deepen the cuts, helped support crude oil prices.
On Dec. 6, OPEC and a group of other oil producers announced they were deepening production cuts originally announced in December 2018 (OGJ Online, Dec. 5, 2019). The group is now targeting production that is 1.7 million b/d lower than in October 2018, compared with the former target reduction of 1.2 million b/d.
OPEC announced that the cuts would be in effect through the end of March 2020. However, EIA assumes that OPEC will limit production through all of 2020, amid a forecast of rising oil inventories.
With production restraint from most OPEC members, continuing sanctions on Iran, and ongoing declines in Venezuela’s crude oil production, EIA expects OPEC production to fall in 2020. EIA forecasts OPEC crude oil production will average 29.3 million b/d in 2020, down by 500,000 b/d from 2019.
However, EIA forecasts that increased non-OPEC production will more than offset those declines and that global liquid fuels supply will rise by 1.5 million b/d in 2020.
EIA forecasts global fuels demand will rise by 1.4 million b/d next year and that Brent prices will average $61/bbl in 2020, down from $64/bbl in 2019.
EIA expects the downward price pressures to be concentrated in the first half of 2020, when global oil inventories are forecast to rise. Prices will begin to rise in the second half of next year based on this STEO’s forecast of global oil inventory draws over that period.
IMO regulations
Beginning on Jan. 1, 2020, the International Maritime Organization (IMO) is set to enact Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention), which lowers the maximum sulfur content of marine fuel oil used in ocean-going vessels from 3.5% of weight to 0.5%.
EIA expects that starting in this year's fourth quarter, this regulation will encourage global refiners to increase refinery runs and maximize upgrading of high-sulfur heavy fuel oil into low-sulfur distillate fuel to create compliant bunker fuels.
EIA forecasts that US refinery runs will rise by 3% from 2019 to a record level of 17.5 million b/d in 2020, resulting in refinery utilization rates that average 93% in 2020. EIA expects one of the most significant effects of the regulation to be on diesel wholesale margins, which rise from an average of ₵45/gal in 2019 to a forecasted peak of ₵61/gal in the first quarter of 2020 and an average of ₵57/gal in 2020.
Trade
EIA data show that US exported 90,000 b/d more total crude oil and petroleum products in September than it imported. This is the first month recorded in US data that US exported more crude oil and petroleum products than it imported.
In this month’s STEO, EIA expects total crude oil and petroleum net exports to average 570,000 b/d in 2020 compared with average net imports of 490,000 b/d in 2019.
US crude production
EIA expects US crude oil production to average 13.2 million b/d in 2020, an increase of 900,000 b/d from the 2019 level. Expected 2020 growth is slower than 2018 growth of 1.6 million b/d and 2019 growth of 1.3 million b/d.
Slowing crude oil production growth results from a decline in drilling rigs over the past year that EIA expects to continue into 2020. Despite the decline in rigs, EIA forecasts production will continue to grow as rig efficiency and well-level productivity rises, offsetting the decline in the number of rigs.
Propane inventories
EIA estimates that propane inventories in the Midwest—Petroleum Administration for Defense District (PADD) 2—were 22 million bbl at the end of November, 17% lower than the 5-year (2014–18) average for the end of November.
Colder-than-normal temperatures and strong grain drying demand in November contributed to large draws on Midwest propane inventories. Also, Western Canadian rail shipments of propane to the Midwest have declined since the opening of a new propane export terminal in Western Canada in May. EIA forecasts Midwest inventories at the end of March will be 32% lower than the 5-year (2015–19) average and the lowest for that time of year since 2014.