Crude oil prices to rise as markets become balanced

International benchmark Brent spot prices are expected to be an average of $44 per barrel in the fourth quarter and rise to $49 per barrel in 2021 as oil markets become more balanced, according to the U.S. Energy Information Administration (EIA). But high inventory levels and surplus crude oil production capacity are expected to limit increases in oil prices.

The EIA released Wednesday (Sept. 9) the Short-Term Energy Outlook for September, and it is subject to uncertainty because of the efforts to mitigate the spread of COVID-19. The Short-Term Energy Outlook assumed U.S. GDP fell by 4.6% in the first half of 2020, from the same period in 2019, and GDP is expected to start rising in the third quarter. GDP is expected to rise by 3.1% in 2021, based on IHS Markit forecasts.

Brent crude oil spot prices rose by $2 per barrel to $45 per barrel in August, from July. The increase happened as global oil markets shifted from a rise in global liquid fuels inventories of 7.2 million barrels per day in the second quarter to drawing from the inventories at a rate of 3.7 million barrels per day in the third quarter. Inventory draws are expected to be 3.1 million barrels per day in the fourth quarter before the market becomes balanced in 2021, with expected draws of 0.3 million barrels per day.

Global consumption of petroleum and liquid fuels is expected to fall by 8.3 million barrels per day to 93.1 million barrels per day in 2020, from 2019. The consumption is expected to rise by 6.5 million barrels per day in 2021, and this is 0.5 million barrels per day less than the previous Short-Term Energy Outlook. The projection change is a result of lower expected consumption growth in China, and the consumption is expected to rise by 1 million barrels per day in 2021.

The global consumption fell by 8.2 million barrels per day to an average of 94.3 million barrels per day in August, from the same month in 2019. The consumption was up from an average of 85.1 million barrels per day in the second quarter and 93.3 million barrels per day in July.

Global liquid fuels production is expected to rise to an average of 99.3 million barrels per day in 2021. The production fell by 9.7 million barrels per day to 91.5 million barrels per day in August, from the same month in 2019. The decline can be attributed to voluntary production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) and reductions in drilling activity and production in the United States because of low oil prices.

U.S. PRODUCTION RISES
Crude oil production in the United States has risen in recent months after falling from 12.7 million barrels per day in the first quarter to a low of 10 million barrels per day in May. Crude oil production rose to 10.8 million barrels per day in August.

“U.S. crude oil production has risen over the past three months as tight oil operators bring wells back online in response to rising prices after curtailing production amid low oil prices in the second quarter,” EIA Administrator Linda Capuano said. “Total U.S. production has increased despite the decline in production from the Gulf of Mexico as a result of Hurricane Laura.”

Production is expected to rise to 11.2 million barrels per day in September as production in the Gulf of Mexico returns. Production is expected to fall slightly after September and average less than 11 million barrels per day in the first half of 2021 because new drilling activity is not projected to generate enough production to offset declines from existing wells. Drilling activity is expected to rise later in 2021, with production rising to 11.3 million barrels per day in the fourth quarter of 2021. U.S. crude oil production will fall from an average of 12.2 million barrels per day in 2019 to 11.4 million barrels per day in 2020 and 11.1 million barrels per day in 2021.

U.S. regular gasoline retail prices are expected to fall through the remainder of the year to an average of $2.03 per gallon in December. The prices are expected to average $2.16 per gallon in 2020 and $2.28 per gallon in 2021. In August, the prices were an average of $2.18 per gallon, flat from July and 44 cents lower than in August 2019.

NATURAL GAS PRICES
Natural gas demand is expected to rise this winter, and this along with reduced natural gas production are expected to lead the Henry Hub natural gas spot prices to rise to a monthly average of $3.40 per million British thermal units in January 2021. Monthly average spot prices are expected to remain higher than $3 per million British thermal units for 2021, with prices averaging $3.19 per million British thermal units. This is up from the expected average of $2.16 per million British thermal units for 2020.

In August, the Henry Hub spot price was an average of $2.30 per million British thermal units, up from an average of $1.77 per million British thermal units in July. The rise can be attributed to rising demand for natural gas from the U.S. electric power sector as a result of warmer-than-normal temperatures in August and rising demand for U.S. liquefied natural gas (LNG) exports amid declining U.S. natural gas production.

Natural gas inventories are expected to reach nearly 4 trillion cubic feet on Oct. 31, and this would be 6% more than the five-year (2015-19) average. As of Aug. 31, working natural gas storage in the United States was 3.5 trillion cubic feet or 13% more than the five-year average.

Total U.S. consumption of natural gas is expected to fall 2.7% to 82.7 billion cubic feet per day in 2020, from 2019. The consumption is projected to fall 4.3% to 79.1 billion cubic feet per day in 2021, from 2020. The expected decline can be attributed to rising natural gas prices that will reduce demand for natural gas in the electric power sector.

Dry natural gas production in the United States is expected to fall to 89.9 billion cubic feet per day in 2020, declining from a monthly record of 96.2 billion cubic feet per day in November 2019 to 85.5 billion cubic feet per day in February 2021. The production is expected to be an average of 86.6 billion cubic feet per day in 2021. Production is expected to start rising in the second quarter of 2021 as a result of higher natural gas and crude oil prices.

U.S. LNG exports rose 19% to 3.7 billion cubic feet per day in August, from July. The rise happened amid increasing spot and forward natural gas prices in Europe and Asia, which had declined to record lows in late May and June as COVID mitigation efforts decreased global natural gas consumption. Higher global forward prices indicate improving netbacks for buyers of U.S. LNG in markets in Europe and Asia 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. U.S. LNG exports are projected to return to pre-COVID levels by November and be an average of more than 9 billion cubic feet per day from December to February 2021.