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SEPTEMBER 2020

U.S. Energy Information Administration Releases Dubious Forecast For Crude Oil Output

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U.S. Energy Information Administration Releases Dubious Forecast For Crude Oil Output

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The Energy Information Administration (EIA) of the US Department of Energy predicted a shortage of oil supply at 2.9 million barrels per day (bpd) in the third quarter of 2020.

Brent crude oil prices rose in May, reflecting a tightening in the global oil market balance. Initial data show that increased global oil demand and a high adherence to production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) drove the price increase.

In the June 2020 Short-Term Energy Outlook (STEO), EIA forecasts that Brent crude oil prices will average $37 per barrel (b) in the second half of 2020, up from a forecast of $32/b in the May STEO.

U.S. Energy Information Administration Releases Dubious Forecast For Crude Oil Output

Click to see full-size image

EIA forecasts that the price of Brent crude oil will average $48/b in 2021—unchanged from the May STEO forecast.

Forecast rising crude oil prices reflect an expectation of declining global crude oil inventories in the second half of 2020 and in 2021.

EIA expects that high inventory levels and ample spare crude oil production capacity will limit upward price pressures in the coming months, but as inventories decline into 2021, those upward price pressures will increase.

Because of its timing, OPEC’s announcement on June 6, 2020, that it will extend the April 12 production cut agreement by one month (now through July) is not accounted for in the June STEO. The STEO forecast reflects an assumption that the additional cuts made by Saudi Arabia, Kuwait, and the United Arab Emirates will end in June 2020, which will partially offset the OPEC production cut extension.

U.S. Energy Information Administration Releases Dubious Forecast For Crude Oil Output

Click to see full-size image

At the same time, in its forecast for the whole year, the EIA follows the general trend for a market collapse. According to EIA calculations, the average oil consumption will be equal to 92.5 million bpd, which is 8.3 million bpd lower than last year.

The supply of fuel will be approximately 97.4 million bpd. That is, the excess of oil on average over the year will be equal to 4.9 million bpd.

If in the third quarter the oil deficit would be 2.9 million bpd, then in the remaining quarters (the first and second that have already nearly passed and the upcoming fourth) the surplus should be approximately 6 million bpd in order to reach 4.9 million bpd on average throughout the year.

It is possible to look at the forests of the US Department of Energy in a different way, but in this case the difference in numbers is so serious that it can’t be attributed to incompetence.

Most likely, this is a managerial “bug” when a scenario analysis commissioned by one of the departments or by the White House administration, came up in an open report.

The question arises whether this is expected or is planned in the third quarter in the USA or in the world, so that the supply drops by 5.4 million bpd compared to the average annual (97.4-92), and demand, on the contrary, grows by 2.4 million bpd (94.9-92.5).

The total imbalance is 7.8 million bpd, which is more than the OPEC countries are reducing currently (6.084 bpd). Conditionally, what scenario was assumed by the EIA?

If the forecast takes into account a second (planned or anticipated) wave of the epidemic, then why, according to the EIA forecast, will not demand fall, but rather supply will do so? The only serious political event (besides coronavirus) that this year is in the plans of all countries of the world is the November presidential election in the United States.

True, November is not in the third, but in the fourth quarter, and according to the forecast, the oil market should drop in the third quarter. This will inevitably cause a jump in prices and create conditions for a forced restart of the shale industry for a short (within one quarter) period. The question remains, where does such a 5.4 million bpd supply shortage come from?

It is almost impossible to imagine that during this period the countries participating in the OPEC + deal will voluntarily take on additional obligations and reduce production by more than 1/3 of their current (maximum) level. What then?

Canada and Iraq have comparable oil production volumes. The first country should be immediately excluded (today Canada is the main supplier of “heavy” oil to the United States).

Then what’s left is Iraq, and the easiest way to reduce oil output is through a new war. However, this relates to the global market, it does not take into account the internal volume of production, but the volume of export. Only the one country in the world, Russia, has an export similar to the oil deficit figure in the EIA forecast for export volume (5.184 million bpd in April). So can it be assumed that tough sanctions on Russia are planned in order to realize the forecast?

Of course, this comes down to speculation, and could even go as far as conspiracy theories, but the current world, with COVID-19, protests in the US, tensions between China and the US and more, impossible and unimaginable keep to be a dime a dozen.

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