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EIA: Crude market balancing more quickly
Agency says US crude production averaged 11.4M bpd in May, down from record 12.9M bpd in November; continued decline expected Kristen Nelson Petroleum News
In its monthly Short-Term Energy Outlook, released June 9, the U.S. Energy Information Administration said it now believes that the crude oil market is balancing more quickly than it thought just a month ago, but also cautions that while revisions to its June forecast are generally smaller than in recent months, the forecast “remains subject to heightened levels of uncertainty because mitigation and reopening efforts related to the 2019 novel coronavirus disease (COVID-19) continue to evolve.”
“Initial data show the global oil market rebalancing faster than EIA previously forecast,” said EIA Administrator Dr. Linda Capuano. She said global inventories, which increased at 9.4 million barrels per day in the first five months of the year, left inventories 1.4 billion barrels higher at the end of May. “However, we expect inventories to begin drawing in June as a result of sharper declines in global oil production during June and greater global oil demand than previously expected,” Capuano said.
EIA said Brent crude oil spot prices averaged $29 per barrel in May, up $11 from April, and are expected to average $37 per barrel during the second half of 2020.
“EIA’s June outlook revises the forecast for Brent spot prices up to $38 per barrel in 2020,” Capuano said. “The change is largely due to higher than expected crude oil prices in May, driven by a combination of additional OPEC+ production cuts, declining U.S. production, and rising demand related to reductions in COVID-19 stay-at-home orders. EIA expects prices to average $48 per barrel in 2021,” she said.
EIA said high inventory levels and spare crude oil production capacity are expected to limit upward price pressures over the next few months, “but as inventories decline into 2021, those upward price pressures will increase.”
US crude EIA said U.S. liquid fuels consumption is expected to average 15.7 million barrels per day in the second quarter, down 4.6 million bpd, 23%, from the same period last year, with the decline reflecting “travel restrictions and reduced economic activity related to COVID-19 mitigation efforts.”
The agency said it believes “the largest declines in U.S. oil consumption have already occurred” and expects demand to rise over the next 18 months.
U.S. crude oil production is estimated to have fallen from a record 12.9 million bpd in November to 11.4 million bpd in May.
“EIA expects a continued decline in U.S. crude oil production,” Capuano said. “Active drilling rigs fell to their lowest level on record in May, offsetting the effect of higher forecast oil prices.”
She said EIA is projecting a continued decline in U.S. oil production through March 2021, “reaching 10.6 million barrels per day before increasing slightly through the end of 2021.”
That 10.6 million bpd level would reflect a decline of 2.2 million bpd from a November 2019 peak.
The agency said a 2020 production decline for the U.S. would be the first annual U.S. decline since 2016.
While there is typically a six-month lag in the impact of price changes on production, EIA said “current market conditions have shortened this lag as many producers have already curtailed production and reduced capital spending and drilling in response to lower prices.”
Domestic natural gas The Henry Hub natural gas spot price averaged $1.75 per million British thermal units in May, EIA said, and it is forecasting “that relatively low natural gas demand will keep spot prices lower than $2/MMBtu through August.” Prices are expected to rise through the end of 2021, with a price rise this fall and winter from an average of $2.05 per million Btu in September to $3.08 in January, with spot prices expected to average $2.04 per million Btu this year and $3.08 in 2021.
U.S. dry natural gas production was at record levels in 2019, but EIA said it expects a decline in production from those levels, from an average 92.8 billion cubic feet per day in 2019 to an average of 89.7 bcf per day this year.
Natural gas production will decline the most in the Appalachian and Permian regions, with low natural gas prices discouraging gas drilling in Appalachia and low crude prices discouraging oil drilling with associated natural gas production in the Permian.
EIA is forecasting U.S. liquefied natural gas exports averaging 5.6 bcf per day in the second quarter and 3.7 bcf per day in the third quarter, with U.S. LNG exports expected to “decline through the end of the summer as a result of reduced global demand for natural gas.”
Global oil stocks EIA said global oil production has been declining as a result of production cuts from members of the Organization of the Petroleum Exporting Countries and their partners, and from declines in tight oil production in the United States. From April to May, EIA said, it estimates that of a 4.5 million bpd decline in non-OPEC liquids production, 1 million bpd was from the U.S.
The use of floating storage has also been declining, EIA said, from an estimated 181 million barrels mid-May, to 164 million barrels on May 29. EIA said the increase in the use of expensive floating storage is estimated to have peaked in April at 21.5 million bpd.
The rapid declines in U.S. crude production could be contributing to a narrowing of the spread between Brent and West Texas Intermediate futures, which, the agency said, “generally reflects the cost of exporting U.S. crude oil to Asia relative to the cost of exporting North Sea crude oil to Asia.”
The agency said the rapid decline in U.S. crude production “is reducing the supply of exportable crude oil and could be increasing the relative value of U.S. crude oil compared to other waterborne crude oils such as Brent, particularly now that European and Asian refiners have begun increasing crude oil runs.” North Sea crude “is generally less price responsive than onshore U.S. crude oil production, keeping Brent-linked crude oil production comparatively elevated,” EIA said.
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