EIA: Short-term energy outlook remains subject to high uncertainty
The US Energy Information Administration’s September Short-Term Energy Outlook (STEO) remains subject to heightened levels of uncertainty because mitigation and reopening efforts related to the 2019 novel coronavirus disease (COVID-19) continue to evolve.
Brent crude oil spot prices averaged $45/bbl in August, up $2/bbl from the average in July and up $26/bbl from the multiyear low monthly average price in April. The increase in oil prices has occurred as EIA estimates global oil markets have shifted from global liquid fuels inventories building at a rate of 7.2 million b/d in the second quarter to drawing at a rate of 3.7 million b/d in the third quarter.
EIA expects inventory draws in the fourth quarter of 3.1 million b/d before markets become relatively balanced in 2021, with forecast draws of 0.3 million b/d. Despite expected inventory draws in the coming months, EIA expects high inventory levels and surplus crude oil production capacity will limit upward pressure on oil prices. EIA forecasts monthly Brent spot prices will average $44/bbl during the fourth quarter of 2020 and rise to an average of $49/bbl in 2021 as oil markets become more balanced.
The macroeconomic forecast EIA used for this STEO assumes US gross domestic product (GDP) declines by 4.8% in 2020 compared with an assumed decline of 6.1% in the August STEO. EIA also assumes a smaller increase in GDP in 2021 of 3.1%, compared with 3.7% growth assumed in the previous forecast. The US macroeconomic assumptions in this outlook are based on forecasts by IHS Markit.
Oil consumption
EIA estimates that global consumption of petroleum and liquid fuels averaged 94.3 million b/d in August, down 8.2 million b/d from August 2019, but it was up from an average of 85.1 million b/d during the second quarter of 2020 and 93.3 million b/d in July.
Indicators of economic activity have largely been higher than market participants’ expectations, particularly in sectors such as housing and in indicators like new durable goods orders. Nonetheless, economic recovery in some sectors that are important for oil consumption, such as personal travel and tourism, has been slower.
EIA forecasts that consumption globally will average 93.1 million b/d for all of 2020, down 8.3 million b/d from 2019, before increasing by 6.5 million b/d in 2021.
EIA expects global consumption will average 99.6 million b/d in 2021, a reduction of 0.6 million b/d from the August STEO. The downward revision primarily reflects lower expected growth in China, where EIA forecasts liquid fuels consumption to rise by 1.0 million b/d in 2021 to average 15.0 million b/d. The revised petroleum consumption reflects a more plausible assessment of the country’s energy intensity of economic growth.
Oil production
EIA estimates that global liquid fuels production averaged 91.5 million b/d in August, down 9.7 million b/d year over year. The decline largely reflects voluntary production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+), along with reductions in drilling activity and production curtailments in the US because of low oil prices. EIA expects global liquid fuels production will rise to an annual average of 99.3 million b/d in 2021.
Crude oil production in the US has risen in recent months after declining from 12.7 million b/d in the first quarter of 2020 to a recent low of 10.0 million b/d in May. EIA estimates US crude oil production increased to 10.8 million b/d in August. Production has risen as tight oil operators have brought wells back online in response to rising prices after curtailing production amid low oil prices in the second quarter. The increase in total US production occurred despite shut-in production in the Gulf of Mexico as a result of Hurricane Laura. EIA expects production to rise to 11.2 million b/d in September as production in the Gulf of Mexico returns.
However, after September, EIA expects US crude oil production to decline slightly, averaging just under 11.0 million b/d during the first half of 2021 because EIA expects that new drilling activity will not generate enough production to offset declines from existing wells.
EIA also expects drilling activity to rise later in 2021, contributing to US crude oil production reaching an average of 11.3 million b/d in the fourth quarter of 2021. On an annual average basis, EIA expects US crude oil production to fall from an average of 12.2 million b/d in 2019 to 11.4 million b/d in 2020 and 11.1 million b/d in 2021.
US natural gas
In August, the Henry Hub natural gas spot price averaged $2.30/MMbtu, up from an average of $1.77/MMbtu in July. Higher natural gas spot prices reflect rising demand for natural gas from the US electric power sector as a result of warmer-than-normal temperatures during August and rising demand for US LNG exports amid declining US natural gas production.
EIA expects that rising domestic demand and demand for LNG exports heading into winter, combined with reduced production, will cause Henry Hub spot prices to rise to a monthly average of $3.40/MMbtu in January 2021.
EIA expects that monthly average spot prices will remain higher than $3.00/MMbtu for all of 2021, averaging $3.19/MMbtu for the year, up from a forecast average of $2.16/MMbtu in 2020.
Total US working natural gas in storage ended August at 3.5 tcf, 13% more than the 5-year (2015–19) average. In the forecast, EIA expects inventories to reach almost 4.0 tcf on Oct. 31, which would be 6% more than the 5-year average.
EIA expects that total US consumption of natural gas will average 82.7 bcf/d in 2020, down 2.7% from 2019. The largest decline in consumption occurs in the industrial sector. EIA forecasts industrial consumption will average 21.9 bcf/d in 2020, down 1.0 bcf/d from 2019 as a result of reduced manufacturing activity.
The decline in total US consumption also reflects lower heating demand in early 2020, contributing to residential and commercial demand in 2020 averaging 12.9 bcf/d (down 0.8 bcf/d from 2019) and 8.8 bcf/d (down 0.8 bcf/d from 2019), respectively. EIA expects US natural gas consumption will average 79.1 bcf/d in 2021, a 4.3% decline from 2020. The expected decline is the result of rising natural gas prices that will reduce demand for natural gas in the electric power sector.
EIA forecasts US dry natural gas production will average 89.9 bcf/d in 2020 and monthly average production will fall from a record 96.2 bcf/d in November 2019 to 85.5 bcf/d in February 2021, before increasing slightly. Natural gas production declines the most in the Permian region, where EIA expects low crude oil prices will reduce associated natural gas output from oil-directed rigs. EIA’s forecast of dry natural gas production in the US averages 86.6 bcf/d in 2021.
EIA estimates that US LNG exports averaged 3.7 bcf/d in August, a 19% increase from July. This increase occurred amid rising spot and forward natural gas prices in Europe and Asia, which had fallen to record lows in late May and June as COVID-19 mitigation efforts reduced global natural gas consumption. Higher global forward prices indicate improving netbacks for buyers of US LNG in European and Asian markets for the upcoming fall and winter seasons amid expectations of natural gas demand recovery and potential LNG supply reduction because of maintenance at the Gorgon LNG plant in Australia. EIA forecasts that US LNG exports will return to pre-COVID levels by November 2020 and will average more than 9 bcf/d from December 2020 through February 2021.
