Category Archives: Production

The May STEO Forecasts Good News on Predicted Pricing, But Concerning Predictions on Production

The U.S. Energy Information Administration (“EIA”) released its Short-Term Energy Outlook (“STEO”) on May 12, 2020, but noted that it was subject to “heightened levels of uncertainty because the effects on energy markets of mitigation efforts related to the 2019 novel coronavirus disease (COVID-19) are still evolving.”

The May STEO elaborated on the extent of this uncertainty as follows: “Reduced economic activity related to the COVID-19 pandemic has caused significant changes in energy supply and demand patterns. Crude oil prices, in particular, have fallen significantly since the beginning of 2020, largely driven by reduced oil demand because of COVID-19 mitigation efforts. Despite the April agreement between the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) to reduce production levels beyond the end of the STEO forecast period, crude oil prices have remained at some of their lowest levels in more than 20 years. Uncertainties persist across EIA’s outlook for other energy sources, including natural gas, electricity, coal, and renewables.”

Aside from uncertainty, what are the takeaways from the May STEO

The good news is that there are some positives:

  • Brent Crude Prices – Better than we Thought?  Prices are predicted to get better than we thought.  According to the May STEO, the EIA forecasts that Brent crude oil prices will average $34/b in 2020, which is down from an average of $64/b in 2019 but better than I think many folks were thinking. The EIA further forecasts that Brent prices will rise to an average of $48/b in 2021, $2/b higher than forecast last month, as EIA expects that declining global oil inventories next year will put upward pressure on oil prices.
  • Natural Gas Prices – On the Rise?  The EIA is also forecasting that natural gas prices will generally rise through the rest of 2020 as U.S. production declines and that Henry Hub natural gas spot prices will average $2.14/MMBtu in 2020 and then increase in 2021, reaching an annual average of $2.89/MMBtu.  The EIA reportedly expects prices to rise largely because of lower natural gas production compared with 2020.

There are some not-so-great aspects of the May STEO as well:

  • Gas and Jet Fuel Consumption – Significantly Down:  According to the May STEO, for all of 2020, the EIA forecasts that U.S. motor gasoline consumption will average 8.3 million b/d, a decrease of 11% compared with 2019, while jet fuel and distillate fuel oil consumption will fall by 25% and 10%, respectively, during the same period.
  • Domestic Crude Oil Production –  The EIA forecasts U.S. crude oil production will average 11.7 million b/d in 2020, down 0.5 million b/d from 2019. In 2021, EIA expects U.S. crude oil production to decline further by 0.8 million b/d.

Despite the positive news about pricing, the forecasts on oil production are significant.  According to the May STEO:

If realized, the 2020 production decline would mark the first annual decline since 2016. U.S. crude oil production has not declined for two years in a row since the 17-year period of declines beginning in 1992 and running through 2008. Typically, price changes affect production after about a six-month lag. However, current market conditions will likely reduce this lag as many producers have already announced plans to reduce capital spending and drilling levels.

It is difficult to predict what oil production will look like in the future, especially given all of the uncertainty.  Many factors, including unknown factors such as specific impacts of COVID-19 on the industry, will come into play.  Stay tuned!

“Agreement in Principle” on OPEC Production Cuts?

The Organization of the Petroleum Exporting Countries (“OPEC”) and other countries including Russia may have reached a tentative agreement during its virtual meeting today to temporarily cut a significant volume of production; however, at the last-minute, Mexico did not approve the deal.

According to The New York Times article entitled, OPEC and Russia Reach a Deal to Cut Oil Production: Live Updates, OPEC and other oil-producing countries reportedly agreed to cut about 10 million barrels a day, or about 10 percent from normal production levels, in May and June, and hope that more cuts can be agreed to tomorrow.  However, Mexico is currently reluctant to join in the deal.

Here are a few headlines to keep you in the know:

Much is still up in the air, especially with Mexico. Whether this temporary production cut will be enough or whether further cuts will follow also remains to be seen. Possible further trims could reportedly come from a meeting of the Group of 20 nations tomorrow.

Stay tuned!