Oil & Energy

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In the June STEO, EIA raised its estimate that 2022 crude oil production will average 11.8 million b/d, up from a forecast average of 11.1 million b/d in 2021. EIA expects rising production will end the persistent global oil inventory draws that have occurred

 EIA STEO WTI June 2021

The increase in economic activity and easing of the COVID-19 pandemic have contributed to rising energy use. U.S. gross domestic product (GDP) declined by 3.5% in 2020 from 2019 levels. This STEO assumes U.S. GDP will grow by 6.7% in 2021 and by 4.9% in 2022. The U.S. macroeconomic assumptions in this outlook are based on forecasts by IHS Markit.

Highlights

  • US crude output to fall to 230,000 BPD vs 290K last month to 11.08M BPD in 2021
  • US crude output to rise 710,000 BPD to 11.79M in 2022 vs 820,000 BPD last month
  • US petroleum demand to rise 1.49M BPD to 19.61M BPD in 2021 vs 1.39M last month.
  • US petroleum demand to rise 1M BPD to 20.61 M BPD in 2022. That was at 1.02M last month

EIA said according to most recent data, U.S. crude oil production averaged 11.2 million b/d in March 2021, an increase of 1.4 million b/d from February. The March rise indicates that the production outages caused by the February winter freeze were temporary and that production came back online quickly.

Because prices of West Texas Intermediate crude oil remain above $60/b during 2021 in the current forecast, we expect that producers will drill and complete enough wells to raise 2022 production from 2021 levels. We estimate that 2022 production will average 11.8 million b/d, up from a forecast average of 11.1 million b/d in 2021.

In the coming months EIA  expect that global oil production will increase to match rising levels of global oil consumption. The rising oil production in the forecast is largely a result of the OPEC+ decision to raise production. We expect rising production will end the persistent global oil inventory draws that have occurred for much of the past year and lead to relatively balanced global oil markets in the second half of 2021 (2H21).

EIA expect Brent prices will remain near current levels in 3Q21, averaging $68/b. However, in 2022, we expect that continuing growth in production from OPEC+ and accelerating growth in U.S. tight oil production—along with other supply growth—will outpace decelerating growth in global oil consumption and contribute to declining oil prices. Based on these factors, we expect Brent to average $60/b in 2022.

Gasoline

EIA expect U.S. gasoline consumption will average 9.1 million barrels per day (b/d) this summer (April–September), which is 1.3 million b/d more than last summer but still more than 0.4 million b/d less than summer 2019. Weekly consumption data reflect the Colonial Pipeline outage and subsequent increase in gasoline demand, but consumption both before and after this event indicate more gasoline demand than we had previously forecast. Our latest forecast also reflects IHS Markit’s increased employment forecast.

EIA expect U.S. gasoline consumption to average 8.7 million b/d in for all of 2021 and 9.0 million b/d in 2022. For the 2021 April–September summer driving season, we forecast U.S. regular gasoline retail prices will average $2.92 per gallon (gal), up from an average of $2.07/gal last summer.

The higher forecast gasoline prices reflect higher crude oil prices and higher wholesale gasoline margins. Wholesale gasoline margins have risen as a result of relatively low inventories and rising gasoline demand. Margins also temporarily widened because of outages on the Colonial Pipeline. These developments caused U.S. average regular gasoline retail prices to reach a monthly average of $2.99/gal in May, peaking at $3.03/gal on May 17, which were the highest monthly and weekly prices since 2014. 

EIA expect that prices will average $3.03/gal in June before falling to $2.76/gal by September. The drop in forecast retail gasoline prices reflects our forecast that gasoline margins will fall this summer in response to rising refinery utilization. For all of 2021, we expect U.S. regular gasoline retail prices to average $2.77/gal and gasoline retail prices for all grades to average $2.87/gal.

Inflation

With a nod to inflation risk the agency said higher prices and more gasoline consumption would result in the average U.S. household spending about $570 (38%) more on motor fuel in 2021 compared with 2020. 

The percentage difference in yields for five-year Treasury Inflation-Protected Securities (TIPS) compared with U.S. treasury bonds is often used to measure market expectations of inflation. Responses to the COVID-19 pandemic resulted in a dramatic decline in demand for goods, which significantly reduced petroleum and other commodity prices in early 2020.

Because crude oil and other commodity prices are inputs to other sectors of the economy, changes in crude oil prices can also affect inflation expectations. The TIPS-Treasury spread decreased to an average of 0.7% in March 2020, reflecting low inflation expectations as a result of lower prices and reduced economic activity 

EIA STEO June 21 Oil and inflation

Inflation expectations have generally increased since August 2020. The TIPS-Treasury spread increased from 2.55% on April 1, 2021, to 2.60% on May 3 (the first trading day of May), before reaching a high of 2.72% on May 12, the spread’s highest point since 2008. The increasing inflation expectations correspond to increases in the Brent crude oil price, which increased from $65/b on April 1 to $68/b on May 3 and $69/b on May 12.

Fuel price increases for consumers and firms as a result of high crude oil prices are an important contributor to inflation expectations. However, the TIPS-Treasury spread also increased at the end of March and into April, while Brent prices remained below their mid-March levels. Differing directional movements between the spread and the crude oil price reflect the effects of other goods and commodity prices on inflation expectations.

 

Forecast depends heavily on future production decisions by OPEC+, the responsiveness of U.S. tight oil production to oil prices, and the pace of oil demand growth, among other factors.

Source: EIA

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