EIA forecasts higher crude oil prices in early 2021, driven by inventory draws
In its latest Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects global oil inventories to generally draw in 2021 and 2022 as a result of increasing forecast global oil demand that outpaces world production growth. EIA forecasts global oil supply will rise, but voluntary production restraint from members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+), along with the lingering effects of low crude oil prices on U.S. tight oil production, will limit global supply increases. As a result, EIA expects global oil inventories to decline by 0.6 million barrels per day (b/d) in 2021 and 0.5 million b/d in 2022. EIA expects the largest draw of 2.3 million b/d will be in the first quarter of 2021, which is expected to drive Brent crude oil prices up to a forecast $56 per barrel (b) (Figure 1). EIA expects inventory draws will moderate after the first quarter of 2021 and crude oil prices will fall, averaging $53/b from the second quarter of 2021 through 2022.
EIA forecasts that OPEC crude oil production will increase in 2021. The production forecast reflects OPEC’s announced increases to production targets and rising production in Libya. On January 5, 2021, OPEC+ announced that it will maintain the previously agreed to January 2021 production increase of 0.5 million b/d. The latest OPEC+ agreement also calls for production increases from Russia and Kazakhstan in February and March (totaling 75,000 b/d per month). Saudi Arabia announced that it would voluntarily cut production by an additional 1.0 million b/d during February and March, however, resulting in lower overall OPEC+ production in early 2021. EIA forecasts that OPEC crude oil production will average 27.2 million b/d in 2021 and 28.2 million b/d in 2022, up from an estimated 25.6 million b/d in 2020.
EIA expects crude oil production in the Lower 48 states, excluding the Federal Offshore Gulf of Mexico, (L48) will decline through February 2021 because declining legacy well production is expected to offset production from new wells. For U.S. tight oil production, EIA analysis shows that changes in oil prices affect changes in crude oil production with about a six-month lag. EIA expects that recent increases in oil prices and active drilling rigs will contribute to L48 production beginning to grow in the second quarter of 2021. EIA expects L48 production will average 8.9 million b/d in 2021, 3% lower than 2020 production levels. As drilling activity increases during the forecast period, EIA expects L48 production will rise by 0.4 million b/d from 2021 and average 9.3 million b/d in 2022. Most of the L48 onshore growth is expected to occur in the Permian region.
Preliminary data and estimates indicate that the global consumption of liquid fuels declined by 9.0 million b/d in 2020, the largest annual decline in EIA data since at least 1980. EIA forecasts that global consumption of liquid fuels will rise by 5.6 million b/d in 2021 and by 3.3 million b/d in 2022. The expected rise in liquid fuels consumption results from forecast growth in global gross domestic product (GDP) as well as a movement toward pre-pandemic levels of travel and other oil use, particularly in late 2021 and in 2022. Based on data and forecasts from Oxford Economics, EIA assumes that global GDP declined by 3.9% in 2020 and that it will grow by 5.4% in 2021 and 4.3% in 2022. Despite EIA’s forecast of growing consumption in 2021, global petroleum and other liquid fuels consumption does not return to 2019 levels in the forecast until early 2022.
EIA expects the recent rise in COVID-19 cases, the re-imposition of some restrictions, and ongoing changes to consumer behaviors because of the pandemic will continue to affect global oil demand in the first half of 2021. Despite uncertainty, EIA expects economic activity in the forecast to increase, partly because of vaccine rollouts. As a result, the pace of oil consumption growth will rely, to a significant extent, on the manufacture and distribution of vaccines on a global scale.
Brent crude oil prices rose to a monthly average of $50/b in December, partly because of continued news about the viability of multiple COVID-19 vaccines. In early January, Brent reached its highest price in 10 months after Saudi Arabia announced unilateral cuts to its crude oil production in addition to its OPEC+ commitments. EIA expects Brent crude oil prices will average $53/b in both 2021 and 2022. Saudi Arabia’s unilateral cut means global oil market balances will likely be tighter in early 2021 than EIA had previously expected. EIA expects global oil inventories will fall by 2.3 million b/d in the first quarter of 2021, contributing to Brent prices increasing from an average of $44/b in the fourth quarter of 2020 to $56/b in the first quarter of 2021 (Figure 2).
Despite rising forecast crude oil prices in early 2021, EIA expects upward price pressures will be limited through the forecast period because of large global oil inventories and surplus crude oil production capacity. EIA expects moderate downward crude oil price pressures to emerge beginning in the second quarter of 2021, when global oil production is forecast to rise and cause inventories to draw at slower rates. EIA forecasts that Brent spot prices will average $51/b during the second half of 2021. Upward price pressures reemerge in the forecast during 2022 as a result of global oil inventory draws accelerating compared with the second half of 2021.
Global economic developments and uncertainty surrounding the ongoing COVID-19 pandemic could push oil prices higher or lower than EIA’s current price forecast.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price increased nearly 7 cents to $2.32 per gallon on January 11, more than 25 cents lower than the same time last year. The Gulf Coast price increased 9 cents to $2.02 per gallon, the East Coast price increased nearly 8 cents to $2.30 per gallon, the Midwest price increased more than 6 cents to $2.22 per gallon, the West Coast price increased more than 4 cents to $2.85 per gallon, and the Rocky Mountain price increased more than 2 cents to $2.21 per gallon.
The U.S. average diesel fuel price increased 3 cents to $2.67 per gallon on January 11, more than 39 cents lower than a year ago. The East Coast price increased more than 5 cents to $2.72 per gallon, the Gulf Coast price increased more than 3 cents to $2.43 per gallon, the West Coast price increased more than 2 cents to $3.14 per gallon, the Midwest price increased more than 1 cent to $2.61 per gallon, and the Rocky Mountain price increased less than 1 cent, remaining virtually unchanged at $2.59 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 6.7 million barrels last week to 66.0 million barrels as of January 8, 2021, 1.4 million barrels (2.1%) less than the five-year (2016-2020) average inventory levels for this same time of year. Gulf Coast, Midwest, East Coast, and Rocky Mountain/West Coast inventories declined by 4.3 million barrels, 1.7 million barrels, 0.6 million barrels, and 0.1 million barrels, respectively.
Residential heating fuel prices increase
As of January 11, 2021, residential heating oil prices averaged almost $2.51 per gallon, nearly 5 cents per gallon above last week’s price but more than 59 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged more than $1.69 per gallon, more than 9 cents per gallon above last week’s price but 34 cents per gallon lower than last year.
Residential propane prices averaged almost $2.09 per gallon, nearly 8 cents per gallon above last week’s price and almost 8 cents per gallon above last year’s price. Wholesale propane prices averaged more than $1.01 per gallon, nearly 12 cents per gallon higher than last week’s price and more than 37 cents per gallon above last year’s price.
