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EIA offers background on energy trends
Agency has been touting uncertainty around monthly outlooks; August analysis provides background on forecast challenges it sees Kristen Nelson Petroleum News
For several months the U.S. Energy Information Administration has been prefacing its monthly outlooks with statements about the uncertainty surrounding them. In its August Short-Term Energy Outlook, EIA said the outlook “remains subject to heightened levels of uncertainty because mitigation and reopening efforts related to the 2019 novel coronavirus disease (COVID-19) continue to evolve.”
In an August analysis, titled “Trends and Expectations Surrounding the Outlook for Energy Markets,” EIA said that as it approaches its annual forecast it conducted “an intensive internal review” aimed at identifying key issues it needed to consider in developing its annual reference case, with COVID-19 and macroeconomic activity key.
Talking about COVID-19, the agency said its longer-term modeling and analysis is “structured around observed data on historic relationships between factors such as prices and income and the decisions that consumers and producers make. A disruption on the scale of the COVID-19 pandemic has no modern precedent. This factor renders energy market projections more vulnerable to unforeseen behavior changes than has ever been the case.”
The impact on its annual forecast, the agency said, is that its reference case “remains dependent on assumptions rooted in experience to date.” With that in mind, use of the full range of its alternative scenarios will be “more important than ever.”
Oil and gas supply impacts In discussing oil and natural gas supply, EIA said the impact of COVID-19 mitigation efforts is “primarily a demand-side shock, with higher impacts for liquids than for natural gas.”
Both oil and natural gas companies were “already headed toward relying on capital from cash flow instead of debt and equity,” EIA said, with companies already capital constrained before COVID-19.
With the current economic downturn, companies are “much more dependent on internal sources of capital because outside sources are less available or may require higher rates of return.”
2020-21 impacts In the short term, this year and next, EIA said its model for Lower 48 oil and gas production is based on a model which reduces rig and well counts when West Texas Intermediate falls below $45 per barrel or the Henry Hub natural gas spot price falls below $2 per million British thermal units.
“In addition to this model-based drop, EIA assumes a further 30% reduction in drilling activity, on average, in the second quarter of 2020 and a 6% reduction in the third quarter of 2020 as a result of low oil prices related to the unprecedented effects of restrictions as a result of COVID-19.”
EIA said it expects the steepest declines in U.S. crude oil production in the second quarter of 2020, with declines averaging 500,000 barrels per day month-over-month, noting that many producers have already announced plans for reduced capital spend and drilling levels.
Production is expected to continue to decline, although more slowly, through March 2021, bottoming out at 10.7 million bpd, a 2.1 million bpd decline from record monthly production last November, with a modest rise through the end of 2021 as oil prices rise.
Annual average crude oil production in the U.S. is forecast at 11.7 million bpd this year and 10.9 million bpd next year, both some 100,000 bpd lower than the numbers in EIA’s April outlook.
2022-50 impacts EIA said it expects lower prices in the short- and medium-term to decrease U.S. oil production.
“In the short to medium term, low oil prices may induce less petroleum product demand growth than might be expected, given the potential for longer lasting behavioral changes as well as a large global petroleum inventory.”
If global demand does not recover, EIA said, “the marginal U.S.-produced barrel from new investment is not needed and global demand can be met either by lower cost barrels produced outside the United States or by putting investment dollars back into U.S. wells currently curtailed, which also cost less than new investment.”
U.S. investment in oil and natural gas could remain “subdued even beyond 2025,” EIA said, depending on the global demand outlook.
Natural gas prices could increase because associated gas production will decline along with declines in oil production over the short to medium term, but EIA said net production effects may be limited, “because any increase from pure play natural gas regions in response to higher prices will be offset from the declines in associated gas.”
Adding to uncertainties for natural gas is highly uncertain international demand for liquefied natural gas in both the medium and long term, something, EIA said, which was true even before COVID-19.
US expected to return to importing With lower U.S. crude oil production this year and next and rising U.S. liquid fuels consumption expected in 2021, the U.S. is expected to return to being a net importer of crude oil and petroleum products in the third quarter of this year, remaining a net importer for most months through the end of 2021, EIA said.
Domestic crude oil production is down 12% from the beginning of the year, with fairly constant export volumes. The agency said the export trend may change “because the volumes that are currently in floating storage or en route to a destination are unclear.”
LNG issues U.S. LNG exports are being impacted by COVID-19, EIA said, with LNG shipments from the U.S. cancelled, which is expected to result in a drop in LNG exports from 8.1 billion cubic feet per day in January to 4.6 bcf per day in September.
EIA said it expects U.S. LNG exports to reach pre-COVID-19 levels in the second half of 2021 but said “lasting market effects could reduce LNG exports in the medium term” compared to its projections.
Thirty to 33 cargoes were reported to be cancelled in June and 45 in August, EIA said, “with current global natural gas forward pricing suggesting additional continued weakness into the fall.”
In the medium to long term, 2022-50, LNG exports are governed by available export capacity and international oil prices. Most planned additions to U.S. export capacity are expected to be completed by the end of 2021. EIA said several proposed export projects have already announced cancellations or delays, likely lowering total projected export capacity through 2025.
The agency said it expects world oil prices to be lower from 2022-25, likely affecting U.S. LNG exports and decreasing capacity utilization since many global LNG shipments are on long-term contracts tied to global oil prices, while “U.S. LNG exports are linked to domestic natural gas prices and are traded on the spot market. As oil and non-U.S. LNG prices drop, U.S. LNG exports will face steeper price competition on the global market.”
EIA had projected average U.S. LNG exports of 9.5 bcf in the medium to long term, but now says it expects that volume to be lower from 2022-25, and while in the long term, driven by lower international oil prices, it expects exports to be lower, “the other major driver of LNG exports is international demand for natural gas, which remains very uncertain.”
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