Cold weather played role in crude oil price increase in February

Extreme winter weather, especially in Texas, contributed to the rise in crude oil prices in February, according to a new outlook from the U.S. Energy Information Administration (EIA). The cold temperatures also led natural gas prices to increase.

The EIA released Tuesday (March 9) the Short-Term Energy Outlook for March that shows disruptions to petroleum supply from the winter weather in the United States, notably in Texas, put upward pressure on crude oil prices in February. International benchmark Brent crude oil spot prices rose $8 per barrel to an average of $62 per barrel in February, from January. The prices were up $7 per barrel from February 2020. The price increase reflected expectations of rising oil demand as COVID-19 vaccination rates and global economic activity have risen. Also, contributing to the price increase were the ongoing supply limitations by the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+).

The EIA’s outlook assumed U.S. GDP will rise by 5.5% in 2021 and by 4.2% in 2022. The previous outlook showed the GDP would rise 3.8% in 2021. The U.S. macroeconomic assumptions are based on forecasts by IHS Markit.

OPEC crude oil production is expected to be flat at 25.3 million barrels per day in April, from March, and down 1.6 million barrels per day from EIA’s projections in its previous outlook. OPEC crude oil production is expected to rise to 26.6 million barrels per day in May. The rise will be the result of Saudi Arabia ending voluntary cuts of 1 million barrels per day and the relaxation of cuts that were extended through April at the March 4 OPEC+ meeting. OPEC is expected to produce 27.9 million barrels per day in the second half of 2021 as OPEC+ increases crude oil output to supply rising global oil consumption.

Following the March 4 meeting, the Brent crude oil spot price rose to $67 per barrel, up 4% from the day before. The price is expected to average between $65 and $70 per barrel in March and April. This is more than $10 per barrel above EIA’s expectations in its previous outlook. Downward price pressure on crude oil is expected in the coming months as the oil market becomes more balanced, according to the EIA. Brent crude oil prices are expected to be an average of $58 per barrel in the second half of 2021.

Global oil inventories are expected to fall by 1.2 million barrels per day in the first half of 2021. But increases in global oil supply will contribute to inventories rising by almost 400,000 barrels per day in the second half of 2021. The market is expected to be balanced in 2022. EIA noted the forecast depends on production decisions by OPEC+, the responsiveness of U.S. tight oil production to higher oil prices and the pace of oil demand growth. Brent prices are projected to be an average of $59 per barrel in 2022.

Global consumption of petroleum and liquid fuels is expected to rise by 5.3 million barrels per day to an average of 97.5 million barrels per day in 2021, from 2020. The consumption is expected to increase by 3.8 million barrels per day to an average of 101.3 million barrels per day in 2022.

In the United States, crude oil production fell by 500,000 barrels per day to 10.4 million barrels per day in February, from January. Most of the decline can be attributed to the cold temperatures that affected the United States, particularly Texas. Unlike northern areas of the country that have winterized oil production infrastructure, the infrastructure in Texas, such as wellheads, gathering lines and processing facilities, are more susceptible to the effects of extremely cold weather, according to the EIA. Crude oil production is expected to rise to almost 11 million barrels per day in March and will average 11.1 million barrels per day in 2021 and 12 million barrels per day in 2022. In 2020, production fell to 11.3 million barrels per day, from 12.2 million barrels per day in 2019. EIA’s projections for crude oil production in 2022 are 500,000 barrels per day higher than its previous outlook because of higher expected crude oil prices.

NATURAL GAS
The cold temperatures also impacted the Henry Hub natural gas spot price in February. The price rose to an average of $5.35 per million British thermal units, from $2.71 per million British thermal units in January. The February price was the highest monthly average since February 2014. The higher prices reflected the increased demand for natural gas because of the much colder-than-normal temperatures throughout most of the United States. Prices rose rapidly because demand increased while natural gas production fell because of well freeze-offs. The prices are expected to be an average of $3.14 per million British thermal units in 2021, up from the 2020 average of $2.03 per million British thermal units. Continued growth in liquefied natural gas (LNG) exports and flat production levels are expected to contribute to the prices to rise to an average of $3.16 per million British thermal units in 2022.

Total natural gas consumption rose to a record of 111.8 billion cubic feet per day in February because of the cold weather, leading to an increase in natural gas demand for heating and power generation. The consumption is projected to decline from February levels as temperatures return closer to normal, based on forecasts by the National Oceanic and Atmospheric Administration. The consumption is expected to be an average of 81.6 billion cubic feet per day in 2022.

“February saw one the largest monthly working natural gas storage withdrawals on record in the United States, including a record withdrawal of 156 billion cubic feet in Texas’ South Central region,” said EIA Acting Administrator Steve Nalley. “EIA forecasts that U.S. inventories at the end of March will be 13% less than the five-year average.” The February withdrawals were a record 829 billion cubic feet, much higher than the average February withdrawal of 452 billion cubic feet.

For 2021, overall dry natural gas production is expected to be an average of 91.4 billion cubic feet per day, up 0.9 billion cubic feet per day from the EIA’s previous outlook. The higher forecasts can be attributed to higher forecast crude oil prices, which are expected to contribute to more associated natural gas production.

U.S. LNG exports are projected to average 7.8 billion cubic feet per day from March to May.

ELECTRIC POWER
U.S. electricity consumption is expected to rise by 2.1% in 2021 after falling 3.8% in 2020. For 2022, total electricity consumption is projected to rise by 1.4%.

“Colder-than-average temperatures in the first quarter of 2021 have contributed to EIA’s 2.7% forecast increase in the U.S. residential consumption of electricity in 2021,” Nalley said. “Despite rolling power outages in Texas and some other states, residential consumption was 10% higher this February compared with February 2020.”

Natural gas is expected to produce 36% of U.S. electric power in 2021 and 35% in 2022, down from 39% in 2020. The decline can be attributed to a rise in natural gas prices. The price for natural gas generators is expected to increase by 44% to $3.46 per million British thermal units in 2021, from $2.40 per million British thermal units in 2020. Coal is expected to produce 23% of the power in 2021 and 2022, up from 20% in 2020. Renewable energy is expected to produce 21% in 2021 and 23% in 2022, up from 20% in 2020. Nuclear is projected to produce 20% in 2021 and 19% in 2022, down from 21% in 2020.

“As a result of an expected increase in natural gas prices, EIA revised the March forecast for coal use in U.S. power generation to be 505 million short tons in 2021 and 517 million short tons in 2022,” Nalley said. “The 2021 forecast is 6% higher, and the 2022 forecast is 2% higher than our February outlook.”

U.S. energy-related carbon dioxide (CO2) emissions are expected to increase by 6% in 2021, from 2020, as economic activity increases and energy use rises. The emissions are projected to rise by 2% in 2022.