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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2020

Vol. 25, No.19 Week of May 17, 2020

EIA expects continued US crude declines

Forecast of 11.7 million bpd this year first annual decline since 2016; Brent averaged $18 per barrel in April, down $13 from March

Kristen Nelson

Petroleum News

Brent crude oil is expected to average $34 per barrel this year, down from $64 in 2019, and is expected to average $48 in 2021, the U.S. Energy Information Administration said in its May Short-Term Energy Outlook, released May 12.

Brent averaged $18 per barrel in April, down $13 from March, EIA Administrator Dr. Linda Capuano said. “Crude oil prices fell as decreasing global demand led to significant inventory builds and concerns over storage capacity limits,” she said.

Inventory draws are expected to begin in July and continue through next year, Capuano said, “putting upward pressure on prices. While high inventory levels will likely keep oil prices in 2021 from returning to levels seen before the COVID-19 pandemic, EIA forecasts crude oil prices will average $48 per barrel next year.”

EIA said oil prices, largely driven down by COVID-19 related reduction in demand, have, despite the April agreement between the Organization of the Petroleum Exporting Countries and partner countries to reduce production, “remained at some of their lowest levels in more than 20 years.”

The oil futures market continued to exhibit significant uncertainty in April due to COVID-19 impacts, the agency said, but noted that crude prices have steadily increased since April 21, a possible indication of easing of downside price pressure.

“Although the outlook for global oil markets remains highly uncertain, April 2020 could mark the low point for oil prices,” EIA said.

US crude production

“EIA has lowered its forecast for production of U.S. crude oil in 2020 to an average 11.7 million barrels per day,” Capuano said, noting that this is the first annual decline since 2016, with a further decline expected in 2021. “EIA expects the United States to return to importing more crude oil and petroleum products than it exports in the third quarter of 2020 and to remain a net importer in most months through the end of 2021,” she said.

EIA said the forecast of 11.7 million bpd this year is down 500,000 bpd from 2019, with a further decline of 800,000 bpd expected in 2021.

The agency said that if the forecast is realized it would be the first time U.S. production has declined for two years in a row “since the 17-year period of declines beginning in 1992 and running through 2008.”

And while there is typically about a six-month lag between price changes and production, EIA said, “current market conditions will likely reduce this lag as many producers have already announced plans to reduce capital spending and drilling levels.”

Domestic natural gas

Henry Hub natural gas spot prices averaged $1.73 per million British thermal units in April, Capuano said. “EIA expects natural gas prices to remain low in the near term as reduced business activity and higher-than-average storage levels keep downward pressure on prices,” she said, but expects prices to rise at the end of May with declines in U.S. production and an increase in natural gas power generation demand.

EIA said it expects Henry Hub spot prices to average $2.14 per million Btu this year, increasing in 2021 to an annual average of $2.89 per million Btu, largely “because of lower natural gas production compared with 2020.”

U.S. dry natural gas production averaged 92.2 billion cubic feet per day in 2019, an annual record, EIA said, and is forecast to average 89.8 bcf per day this year, falling from an estimated 93.1 bcf per day in April to 85.4 bcf per day in December, and declining most in the Appalachian and Permian regions, driven by low natural gas prices in the Appalachian region and low oil prices in the Permian, which reduce associated gas output from wells targeting oil.

Dry natural gas production is forecast to average 84.9 bcf per day in 2021.

U.S. liquefied natural gas exports are forecast to average 5.8 bcf per day in the second quarter of this year and 4.8 bcf in the third quarter, and “exports are expected to decline through the end of the summer as a result of lower expected global demand for natural gas.”

US consumption, supply

EIA said it assumes “significantly lower levels of U.S. liquid fuels consumption” for much of this year due to the impact on travel of reduced economic and business activity in response to COVID-19.

“These impacts are expected to be most pronounced during the second quarter of 2020, when most containment measure and wide-scale reductions in business activity are assumed to be in place,” with impacts persisting through the year but with liquid fuels consumption gradually increasing in the second half of the year.

U.S. liquids fuels consumption is expected to average 15.9 million bpd in the second quarter and increase to 18.7 million bpd in the third quarter, averaging 19.8 million bpd in 2021, “up 8% from 2020, but lower than 2019 levels.”

Jet fuel consumption is expected to see the greatest impact, down 25% year over year, and down by more than 50% year over year in the second quarter of this year, with gasoline and distillate fuel consumption expected to fall by about 10% compared to 2019.

EIA said its model for Lower 48 U.S. oil and gas production reduces the forecast for rigs and wells when West Texas Intermediate falls below $45 per barrel or Henry Hub falls below $2 per million Btu. The agency said it “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,” and noted that many producers have already announced reduction in capital spending and drilling.

EIA said it expects the steepest declines in U.S. oil production will be in the second quarter, with month-over-month declines averaging 500,000 bpd in those three months.

The agency expects production declines to continue, although at a slower rate, through March 2021, and to bottom out at 10.7 million bpd, a 2.1 million bpd decline from the record set in November 2019.

As crude oil prices rise, EIA expects production to rise modestly through the end of 2021, with average annual production of 11.7 million bpd this year and 10.9 million bpd in 2021.






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