EIA forecast cites heightened uncertainty

Agency projecting 500,000 bpd drop in US production for 2020, further drop next year; Brent down $24 per barrel at $32 for March

All market forecasts are subject to uncertainty, the U.S. Energy Information Administration said in releasing its Short-Term Energy Outlook April 7, but the sudden increase in crude oil supply combined with the impact on demand of the COVID-19 pandemic have made this outlook “subject to heightened levels of uncertainty” as those impacts on energy markets are still evolving.

“Significant disruptions to the global economy and reduced travel related to COVID-19 led EIA to lower expected demand growth for 2020,” EIA Administrator Dr. Linda Capuano said in an April 7 statement accompanying the STEO release. “EIA estimates that consumption of global petroleum and liquid fuels in the first quarter fell by 5.6 million barrels per day compared with the same period last year. We forecast liquid fuels demand will decrease by 5.2 million barrels per day in 2020 before increasing by 6.4 million barrels per day in 2021.” With the drop, EIA estimated first quarter demand at 94.4 million bpd, down from 100.7 million bpd in 2019.

In March, the Organization of the Petroleum Exporting Countries and partner countries, OPEC+, suspended agreed-upon production cuts, and despite resulting market oversupply and recent news of emergency OPEC+ meetings, EIA said it is assuming those cuts will not be re-implemented.

The agency said it is assuming that Saudi Arabia will ramp up its production to near full capacity in the second quarter “in an attempt to regain global market share as higher-cost production declines elsewhere.”

Which means storage volumes will grow.

“EIA expects global liquid fuels inventories to grow by an average 3.9 million barrels per day in 2020 as a result of widespread travel limitations and sharp reductions in economic activity,” Capuano said, with global petroleum inventories estimated to “increase an average of 11.4 million barrels per day during the second quarter of 2020, which would be the largest rate of inventory increases on record.”

Prices down

“EIA expects large stock builds will put downward price pressure on crude oil prices for several months,” Capuano said.

Brent is forecast to average $33 per barrel this year, $10 lower than its forecast last month, and down from a 2019 average of $64 per barrel.

The agency expects prices to average $23 per barrel in the second quarter, increasing to $30 per barrel in the second half of the year, and averaging $46 per barrel in 2021, “as a return to declining global oil inventories puts upward pressure on prices.”

US crude production to drop

U.S. crude production is now forecast to average 11.8 million bpd this year, the agency said, and to decline a further 700,000 bpd in 2021, marking the first annual decline since 2016.

There is typically a six-month lag between price changes and production, but EIA said “current market conditions, combined with the COVID-19 pandemic, will likely reduce this lag as many producers have already announced plans to reduce capital spending and drilling levels.”

IHS Markit said in an April 8 release that its calculations show oil and gas companies focused on North America plan to reduce spending in 2020 by 36% from last year, due to the collapse in demand and low oil prices. The company said North American cuts are estimated to be $24.4 billion from last year, with international companies also cutting significantly, by 20% to 30%, with a substantial part of that cut, for some of the companies, coming from U.S. operations.

“The Big Cut is here. The U.S. government can’t order cutbacks like other countries. But economics and the market are mandating dramatic budget cuts that will bring down U.S. production this year,” said IHS Markit Vice Chairman Daniel Yergin.

Between North American E&P companies, non-North American E&P companies and international oil and gas companies, IHS Markit said capex in 2019 was $317.1 billion, projected to drop to $235.1 billion this year, a difference of 26%, $82 billion.

Natural gas

U.S. dry natural gas production averaged 92.2 billion cubic feet per day last year, a record, and is forecast to average 91.7 bcf per day this year, dropping to 87.5 bcf per day in 2021, although “rising in the second half of 2021 in response to higher prices.”

U.S. liquefied natural gas exports are expected to average 6.6 bcf per day in the second quarter of the year, and 6 bcf in the third quarter because of lower expected global demand.

Lower 48 assumptions

In addition to changes based on its model, the agency said it “assumes a further 15% reduction in activity on average in the second quarter of 2020 and a 12% reduction in the third quarter of 2020 to account for the unprecedented effects of COVID-19 on the level of drilling activity as many producers have already announced plans to reduce capital spending and drilling levels.”

For natural gas production, EIA said its Lower 48 model assumes a reduction in rigs and wells when WTI falls below $45 per barrel or Henry Hub falls below $2 per million Btu. As with crude, EIA is assuming a further 15% reduction in activity in the second quarter and a 12% reduction in the third quarter because of COVID-19 impacts.

In an April 7 release, IHS Markit said low oil prices could result in a drop of 8-10 bcf per day of associated gas by the end of 2021. Associated gas, produced together with oil, is nearly one-third of total U.S. gas production, the company said, and volumes will fall as crude oil production drops, a reduction in gas supply which “will help offset or even overtake the drop of gas export demand as a result of COVID-19.”

Narmadha Navaneethan, director of North American upstream research for IHS Markit, said: “Roughly speaking, for every 500,000 bbl/d of oil production drop, we see associated gas volumes fall by about 1 Bcf/d. Considering the depth and duration of the global oil situation, we could see an 8 Bcf/d reduction in associated gas.”