Global liquid fuels

The disruptions to global petroleum supply and consumption as a result of COVID-19 and associated mitigation efforts have been significant. As road and air travel fell sharply when economies around the world went into lockdown in the first quarter and early second quarter of this year, global liquid fuels consumption fell more quickly than production. Based on the mismatch between production and consumption of liquid fuels, EIA estimates that global oil inventories increased by almost 1.3 billion barrels from the start of 2020 through the end of May. Inventory accumulation caused Brent crude oil spot prices to fall from a monthly average of $64 per barrel (b) in January to $18/b in April. In late April, when price declines were the steepest, market participants had concerns about the ability of global storage capacity to hold the quickly rising inventory.

The situation in oil markets has now shifted. EIA estimates that, in June, global consumption of petroleum and other liquid fuels was up 10 million barrels per day (b/d) from April levels as economies worldwide have begun emerging from lockdown. EIA estimates global supply has fallen by 12 million b/d during the same period as a result of reduced production from OPEC+ and price-driven declines and curtailments in the United States and Canada. These changes in EIA’s supply and demand estimates have shifted global oil markets from 21 million b/d of oversupply in April to inventory draws in June.

EIA expects global oil inventories to generally draw through the end of 2021 as EIA forecasts global oil demand will continue to recover. Although EIA’s forecast consumption of global liquid fuels of 101.1 million b/d in the fourth quarter of 2021 would still be less than during the same period of 2019, it would be 16.7 million b/d more than in the second quarter of 2020. EIA also expects global oil supply to rise in the coming quarters. However, voluntary production restraint from OPEC+ producers, along with the lingering effects of low oil prices on U.S. tight oil production, will limit increases. As a result, EIA expects global oil inventories to decline at a rate of 1.8 million b/d through the end of 2021, eliminating most of the surplus that accumulated in early 2020. These inventory draws will likely put upward pressure on oil prices, but that pressure will be partly offset by high existing oil inventories, particularly in the second half of 2020, and a large amount of spare crude oil production capacity. The trajectory of both supply and demand are highly uncertain, however, and EIA will continue to closely track incoming data and oil market drivers in the coming months and adjust our forecasts accordingly.

Global Petroleum and Other Liquid Fuels Consumption. In the July STEO, EIA revised its 2020 global oil consumption forecast to reflect the most up-to-date information available on the impacts of COVID-19 and associated mitigation efforts on global oil consumption.

Initial data indicate the extent of demand declines for global liquid fuels were not as significant as EIA had previously estimated. EIA estimates that consumption of global liquid fuels averaged 84.4 million b/d in the second quarter of 2020, down by 16.3 million b/d from the same period in 2019. Although these declines are the largest for any quarter on record, EIA had estimated a drop of 16.6 million b/d in the June STEO, and EIA had estimated a drop of 18.8 million b/d in the May STEO. Initial second-quarter consumption data for the United States was 0.4 million b/d more than estimated in the June STEO and consumption in Canada and Brazil were each about 0.3 million b/d higher. Those increases were partly offset by lower-than-expected liquid fuels consumption in India and China.

EIA’s most recent estimates of global oil consumption in the second quarter came in higher than in the previous forecast despite a lower assumed level of economic activity compared with previous forecasts. The July STEO’s forecast for global economic growth is based on forecasts from Oxford Economics. In the July STEO, EIA assumes global oil consumption-weighted gross domestic product (GDP) in 2020 will decline by 5.7% from 2019, compared with an assumed decline of 5.0% in the June STEO. The sharpest declines occur in the second quarter of 2020, when oil consumption-weighted GDP is estimated to have declined by 10.3% compared with the second quarter of 2019. In the June STEO, the assumed decline in second-quarter 2020 GDP was 8.6%. In 2021, EIA assumes global GDP weighted by oil consumption will grow by 6.3%.

For the full year of 2020, EIA forecasts that consumption of global liquid fuels will average 92.9 million b/d, down 8.1 million b/d from 2019. EIA forecasts that both oil-consumption weighted GDP and global liquid fuels consumption will begin increasing in the third quarter of 2020 and will continue increasing through 2021. However, EIA expects global liquids consumption in the second half of 2020 to remain lower, by 5.8 million b/d, than the same period in 2019, which would still be an increase of 6.2 million b/d from the first half of the year. The increase in oil consumption results from a normalization of economic activity following COVID-19-related disruptions. Although EIA expects steady increases in consumption of gasoline and diesel in the second half of 2020, forecast jet fuel consumption remains weak as EIA expects the recovery in air travel to lag behind the recovery in road travel in most countries.

Annual average global consumption of liquid fuels rises in 2021 by 7.0 million b/d from 2020 levels. This increase reflects forecast GDP growth and increases in travel. However, any lasting changes to transportation and other oil consumption patterns once the effects of COVID-19 and associated mitigation efforts end present considerable uncertainty to the increase in liquid fuels consumption for 2021.

Non-OPEC Production of Petroleum and Other Liquid Fuels. EIA estimates that non-OPEC production of petroleum and other liquid fuels fell by 5.4 million b/d in the second quarter of 2020 from the first quarter of the year. Almost 85% of these declines came from the three largest non-OPEC producers: the United States, Russia, and Canada. U.S. declines resulted from a drop in active drilling rigs in response to low oil prices. Declines in Russia were the result of voluntary reductions resulting from the April OPEC+ agreement. In Canada, declines largely reflected a drop in activity at oil sands operations in Alberta because of low oil prices.

EIA forecasts that for 2020 as a whole, non-OPEC production will decline by 2.2 million b/d from 2019 levels. EIA expects that the second quarter marked a low point for non-OPEC production, and it will begin rising in the third quarter as oil demand increases. EIA expects production of non-OPEC petroleum and other liquid fuels to increase by 1.1 million b/d in 2021. Production in countries that have implemented voluntary cuts will generally rise in 2021 as global oil demand recovers. However, EIA forecasts production to continue to decline in the United States, where production is driven by price-sensitive shale operators.

In Russia, EIA forecasts production to decline sharply in 2020 and grow in 2021 as OPEC+ cuts limit production in 2020 and moderate in 2021. EIA expects Russia to experience the largest liquid fuels production declines in 2020 among OPEC+ producers, with forecast declines of 1.0 million b/d compared with 2019. EIA expects Russia’s liquid fuels production to rise by 0.6 million b/d in 2021.

EIA expects total production of liquid fuels in the United States to fall by 0.7 million b/d in 2020, largely as a result of reduced drilling in price-sensitive tight oil regions. EIA expects U.S. production to fall by 0.3 million b/d in 2021.

EIA expects Canada’s total liquid fuels production to fall by 0.4 million b/d in 2020. This decrease is a result of both 2019 government-ordered production cuts in Alberta that continue into 2020 and economic shut-ins because of the effect of low oil prices and falling demand for oil exports. In 2021, EIA expects Canada’s production to increase by almost 0.5 million b/d and surpass 2019 levels in the second half of the year as demand rebounds and deferred or shut-in projects come online. EIA expects no additional Canadian production from new upstream projects to come online during the forecast period, only expansions or debottlenecking of existing projects. EIA does not expect any new Canadian pipeline capacity until the second half of 2021.

Mexico agreed to 100,000 b/d of oil production cuts under the April OPEC+ agreement. However, Mexico declined to extend cuts past June, breaking from other OPEC+ producers. Independent of the OPEC+ agreement, EIA forecasts crude oil production to decline in Mexico in 2020 and 2021 because of natural declines in mature fields. Overall, EIA expects Mexico’s annual average liquid fuels production to fall by almost 100,000 b/d in 2020 and by a similar amount in 2021.

EIA expects a number of other non-OPEC producers will experience notable production declines in 2020, including India, Azerbaijan, Kazakhstan, Colombia, Malaysia, and Egypt. Forecast annual average declines in each of these countries range between 50,000 b/d and 100,000 b/d.

The only non-OPEC countries where EIA expects production will grow significantly in 2020 are Brazil and Norway. EIA expects Brazil’s production of petroleum and other liquid fuels to grow by 0.2 million in 2020 b/d and by 0.3 million b/d 2021. On April 1, Brazil’s national oil company, Petroleo Brasileiro, S.A. (Petrobras), deepened its production cuts to 0.2 million b/d for 2020. Weeks after this announcement, Petrobras reversed these cuts as demand for crude oil exports remained strong. In addition, EIA now expects the P-70 floating, production, storage, and offloading vessel (FPSO) in Brazil to start production in the second half of 2020, bringing on additional volumes. The P-70 was originally scheduled to begin producing in the first half of 2020, before it was damaged in a storm in February 2020. This expected new supply growth offsets planned heavy maintenance for the second half of 2020. EIA also estimates Brazil’s biofuels production was lower in the first half of 2020 than previously estimated because of reduced ethanol demand related to COVID-19 mitigation efforts combined with weak ethanol prices relative to sugar prices that caused sugar cane millers to shift toward more sugar production.

Despite voluntary production cuts announced in April 2020, EIA expects production growth in Norway during 2020 and 2021. Norway’s Ministry of Petroleum and Energy enacted unilateral production cuts on the Norwegian continental shelf, which will limit production of crude oil from June to December 2020. These cuts limit growth in total liquids production in 2020 to less than 0.3 million b/d. After the expiration of production limits, EIA forecasts production growth of 0.1 million b/d in 2021. Phase 1 of the Johan Sverdrup field came online in October 2019 and reached production of more than 0.4 million b/d in early 2020 before the government production cuts took effect. The Johan Sverdrup field will drive most of the production growth in Norway in 2020 and 2021.

OPEC Production of Petroleum and Other Liquid Fuels. On June 6, 2020, OPEC+ announced that they were extending through July the large production cuts for May and June originally announced in April 2020. In addition, OPEC+ producers reconfirmed the remaining cuts under the April agreement that extend into 2022. EIA assumes that participating OPEC+ countries are broadly complying with the May–July cuts.

EIA forecasts OPEC crude oil production will fall below 22.5 million b/d in July, a 7.9 million b/d decline from April. If OPEC production declines to forecast levels in July, it would be the group’s lowest level of crude oil production since November 1991. After July, EIA expects OPEC will continue to limit production, but to a lesser degree as cuts are relaxed, global oil demand rises, and compliance lessens. With increases in forecast global oil demand growth in 2021, EIA assumes that OPEC members will further increase production in the face of large oil supply/demand imbalances that lead to large stock drawdowns and rising oil prices. EIA forecasts that OPEC crude oil production will average 29.2 million b/d in 2021, up 3.2 million b/d from 2020 but about the same as 2019 levels.

Venezuela, Libya, and Iran are not subject to the OPEC+ agreement. EIA expects Venezuela’s production to continue falling throughout the forecast period. Production declines accelerated following the imposition of new sanctions by the United States government on Rosneft Trading in mid-February. In addition, the decline in global oil demand following the onset of the COVID-19 pandemic further reduced the demand for Venezuela’s oil. Much of Venezuela’s exports had been used for in-kind loan payments to China; however, the decline in oil demand from China in 2020 as a result of COVID-19 mitigation efforts further reduced outlets for Venezuela’s oil production.

Libya’s crude oil production fell in the first half of 2020 after the January closure of five export terminals in eastern Libya and the pipelines connecting the El Sharara and El Feel oilfields to those terminals. By May 2020, Libya’s crude oil production averaged 80,000 b/d, down from 1.2 million b/d at the end of 2019. With the ongoing civil war in Libya, EIA does not expect production to increase until late 2020. However, that forecast is very uncertain as the timing of any settlement or resolution in Libya’s civil war is not possible to forecast. Once currently shuttered export terminals and oil fields reopen, EIA expects that Libya will boost production to near-capacity in a relatively short time despite low oil prices.

EIA expects that crude oil production in the Neutral Zone shared between Saudi Arabia and Kuwait, which resumed in March 2020, will increase to full production levels in 2021, following a one-month hiatus in June 2020. However, EIA assumes that increases in Neutral Zone production will be offset elsewhere, as Kuwait and Saudi Arabia reduce production at other fields in response to the OPEC+ cuts.

EIA estimates that OPEC production of other liquids will decline to 4.8 million b/d on average in 2020, down from 5.4 million b/d in 2019. The 2020 decrease in production of other liquids is the result of less associated liquids production stemming from a reduction in crude oil production because of the OPEC+ cuts. The decrease in production of other liquids in 2021 is the result of less expected condensate output in Iran.

EIA expects that OPEC surplus crude oil production capacity, which averaged 2.5 million b/d in 2019, will average 5.7 million b/d in 2020, peaking during the third quarter of 2020 at 7.9 million b/d before declining to 3.1 million b/d on average in 2021. The forecast 2020 annual level would mark the first time since 2002 that surplus capacity averaged at least 5 million b/d and would be the highest level since the mid-1980s. The fluctuations in surplus capacity are a direct result of crude oil production changes in response to the OPEC+ agreement. These estimates do not include additional capacity that may be available in Iran but is offline because of U.S. sanctions on Iran’s oil sales.

Global Petroleum Inventories. A faster recovery of global oil demand and steeper declines in global oil production than EIA had forecast in previous outlooks mean inventory builds during the first five months of 2020 were not as large as previously expected. EIA now estimates that implied global oil inventory growth (measured as the difference between estimated global liquid fuels demand and production) averaged 8.4 million b/d from January through May. This level of growth implies oil inventories stood almost 1.3 billion barrels higher at the end of May than they did at the start of the year. In the June STEO, EIA had estimated builds of more than 1.4 billion barrels during this period.

EIA now forecasts that global petroleum inventory builds will average 1.7 million b/d in 2020, compared with the 2.2 million b/d inventory build EIA had forecast in the June STEO. EIA estimates that global inventories began declining in June. Forecast petroleum inventory draws average 3.3 million b/d for the second half of 2020 and 1.1 million b/d in 2021. As a result, EIA expects that commercial crude oil and other liquid fuels inventories held within the Organization of Economic Cooperation and Development (OECD), which peaked at an estimated 3.3 billion barrels in May, will decline to 3.0 billion barrels by the end of 2020. By the end of 2021, the inventory builds that occurred in 2020 will have disappeared, and OECD commercial inventories will fall below 2.9 billion barrels, a level last seen at the end of February 2020.

Crude Oil Prices. Brent crude oil spot prices averaged $40/b in June, up $11/b from May and up $22/b from the multiyear lows from April. Prices rose as OPEC+ producers agreed to extend the deepest production cuts through July and as indications that many locations previously under lockdown orders were increasing liquid fuels demand. Given supply reductions and rising demand, EIA estimates that global oil inventories declined in June for the first time since December 2019. This decline followed five months in which global oil inventory builds averaged 8.4 million b/d, which caused crude oil prices to drop sharply. Because EIA expects global oil demand to exceed supply in the second half of 2020, and continue to exceed through the forecast period, EIA expects crude oil prices to rise through the end of the forecast. However, existing inventory levels, significant OPEC surplus production capacity, and uncertainty about the trajectory of oil demand will likely limit upward crude oil price movements, particularly in the third quarter of 2020.

EIA expects Brent crude oil prices to average $41/b during the second half of 2020 and $50/b during 2021, reaching $53/b by the end of 2021. However, this price path reflects global oil consumption of 96.0 million b/d during the second half of 2020 along with relatively strict compliance to announced OPEC+ production cuts, both of which are uncertain. Also, the degree to which the U.S. shale industry responds to the recent relative strength in oil prices compared with their recent lows in April will affect the oil price path in the coming quarters.

Global economic developments and numerous uncertainties surrounding the ongoing COVID-19 pandemic in the coming months could push oil prices higher or lower than the current STEO price forecast. Uncertainty also remains regarding the duration of, and adherence to, the current OPEC+ production cuts. Lastly, the U.S. tight oil sector continues to be dynamic, and the ability of producers to adjust to an especially volatile pricing environment in the face of significant reductions in drilling activity in recent months could affect both current crude oil prices and expectations for future prices.

EIA forecasts West Texas Intermediate (WTI) crude oil prices will average about $3/b less than Brent prices in 2020 and $4/b in 2021. This price discount is based on EIA’s assumption that the current reduced discount of WTI to Brent of $2/b on average in June reflects significant declines in U.S. crude oil production and reduced available volumes of U.S. crude oil for export to distant markets relative to other global benchmarks. As the global market adjusts to reduced demand and production levels, EIA expects the spread to return to $4/b by the end of 2020 based on the relative cost of exporting U.S. crude oil from the Cushing distribution hub to Asia, compared with Brent crude oil from the North Sea.