Global liquid fuels
Global Petroleum and Other Liquid Fuels Consumption. EIA expects global oil consumption will grow by an average 1.1 million barrels per (b/d) in 2019. This growth is 0.2 million b/d lower than forecast in the June STEO and marks the sixth consecutive month that EIA has revised down its 2019 global consumption growth forecast. EIA expects global oil consumption to increase by 1.4 million b/d in 2020, similar to the June STEO.
The downward revision for 2019 reflects lower-than-expected oil consumption so far this year, in addition to slowing economic growth in many of the world’s largest oil-consuming countries. EIA’s International Energy Statistics, based on data from the International Energy Agency, recently reported that oil consumption in the first quarter of 2019 among countries in the Organization for Economic Cooperation and Development (OECD) was 350,000 b/d lower than estimated in last month’s STEO. Warmer-than-normal weather in OECD countries and slowing economic growth contributed to lower demand. In addition, based on forecasts from Oxford Economics, EIA lowered its 2019 global oil-weighted gross domestic product (GDP) growth projection to 2.2%, which would be the lowest annual growth rate since 2009.
EIA expects little growth in OECD liquid fuels demand in 2019. Although EIA still expects the United States to show continued increases in demand, its annual growth is forecast to slow from 0.5 million b/d in 2018 to 0.2 million b/d in 2019. EIA expects U.S. growth will be offset by declining liquid fuels consumption in Japan, Canada, and Europe.
EIA forecasts that non-OECD liquid fuels consumption will rise by 1.1 million b/d in 2019, led by China’s demand growth of 550,000 b/d. China’s demand growth is increasingly shifting toward hydrocarbon gas liquids (HGL) and away from transportation fuels such as gasoline and diesel. EIA raised its estimate of the HGL demand growth from new Chinese petrochemical plants in 2019 to 290,000 b/d. As a result, EIA expects more than half of China’s total liquid fuels consumption growth will come from HGL. Were it not for the addition of these new petrochemical plants, China’s liquid fuels demand growth would be less than 300,000 b/d in 2019. The last time that China’s liquid fuels demand grew by less than 400,000 b/d was in 2008.
EIA expects global oil-weighted GDP growth to be 2.7% in 2020, leading to increased oil demand growth in both the OECD and non-OECD countries. EIA expects world liquid fuels consumption growth of 1.4 million b/d in 2020. Two-thirds of all forecast demand growth in 2020 will come from a combination of China, the United States, India, and Russia.
In addition to higher economic growth in 2020 compared with 2019, EIA expects continued global petrochemical demand growth to drive oil demand growth. In China, EIA expects overall oil demand to increase by 470,000 b/d, with about 200,000 b/d of that growth resulting from new petrochemical plants. In the United States, EIA forecasts overall oil demand to grow by 210,000 b/d, and 130,000 b/d of that growth results from higher HGL consumption (although not all for petrochemical use). In Russia, about half of EIA’s forecast demand growth of 110,000 b/d is driven by rising petrochemical demand.
Marine distillate use in non-OECD countries will also likely increase in 2020, when more stringent International Maritime Organization (IMO) specifications on sulfur levels in bunkering fuel (IMO 2020) come into effect. The use of high-sulfur residual fuel oil for bunkering fuel will decline. The switch from highly energy-dense residual fuel to marine distillate will likely result in an increase in total liquid fuels consumption of about 0.1 million b/d because using less energy-dense fuel will require some increase in volume to serve an equivalent level of shipping traffic.
Non-OPEC Petroleum and Other LIquid Fuels Supply. EIA expects petroleum and other liquid fuels production in countries not part of the Organization of the Petroleum Exporting Countries (OPEC) to rise by 2.3 million b/d in 2019 and by 2.1 million b/d in 2020, compared with growth of 2.6 million in 2018. EIA’s forecast growth in the United States contributes 2.0 million b/d in 2019 and 1.4 million b/d 2020, with Brazil providing another 0.2 million b/d in 2019 and 0.3 million b/d in 2020. EIA expects Canada and Norway to also be key contributors to non-OPEC growth in 2020.
Growth in Brazil’s petroleum and other liquid fuels production is the result of at least six new floating production, storage, and offloading vessels (FPSOs) that have been added since 2018. Similarly, EIA expects up to three more planned FPSOs will continue to drive growth through 2020. EIA also expects the output from the Santos Basin, in particular the newly commissioned FPSOs in the Lula and Buzios fields, to produce enough crude oil during the next two years to offset declines in Brazil’s more mature onshore and offshore areas.
EIA expects Canada’s total liquid fuels production to decrease slightly in 2019 as a result of province-level government-imposed production cuts in Alberta. In 2020, EIA expects Canadian production to increase by 0.2 million b/d after the cuts end in late 2019. EIA does not expect any additional production from new upstream projects to come online during the forecast period but does expect expansions of existing projects to continue. However, the uptake of crude by rail and the timing of pipeline capacity coming online remain uncertain and have the potential to temper growth in 2020.
Another source of growth for non-OPEC petroleum and other liquid fuels production in the forecast period is Norway. EIA expects that Norway’s production will grow in 2020 after three years of declines. Phase 1 of the Johan Sverdrup field, scheduled to come online by the end of 2019, drives most of Norway’s almost 0.2 million b/d expected production growth in 2020. The Martin Linge field and a number of smaller fields are scheduled to come online in 2020 and also contribute to the expected growth.
On July 2, OPEC producers and several non-OPEC producers (OPEC+), notably Russia, extended production cuts announced in December 2018 through the end of the first quarter of 2020. EIA expects Russia’s liquid fuels production to decline by 30,000 b/d in 2020 as a result of the cuts.
OPEC Petroleum and Other Liquid Fuels Supply. EIA expects OPEC crude oil production to average 30.2 million b/d in 2019, a decrease of 1.8 million b/d compared with the 2018 level, and expects that production will decrease by 0.5 million b/d in 2020. The forecast decline is the result of Saudi Arabia’s over-compliance with the December 2018 OPEC+ agreement in the first half of 2019 and rapidly decreasing crude oil production in Iran and Venezuela. Combined production in Iran and Venezuela fell to an estimated 2.8 million b/d in June 2019, a 2.4 million b/d decrease compared with June 2018. These factors contributed to OPEC’s crude oil production averaging 29.9 million b/d in June, the lowest level since mid-2014.
EIA’s forecast assumes the OPEC+ agreement will remain in place through the end of the first quarter of 2020, with OPEC+ continuing to target a balanced market through the forecast period. EIA expects the level of production cuts will contribute to a draw in global stocks in the third quarter of 2019, before the global market sees some inventory builds in the fourth quarter of 2019 and a generally balanced market in 2020. Compliance with production targets in the OPEC+ agreement will be a key factor for whether the level of global crude oil inventories remains higher than the five-year (2014–18) average during the forecast period.
EIA estimates that during June 2019, Saudi Arabia’s crude oil production averaged an estimated 10.1 million b/d, increasing by 0.2 million b/d from May levels in response to seasonal domestic consumption increases and crude oil production declines in Iran. Saudi Arabia’s crude oil production has decreased by about 0.9 million b/d since reaching its all-time high in November 2018, averaging about 10.0 million b/d in the first half of 2019.
EIA expects the United Arab Emirates (UAE) and Iraq to be the main sources of crude oil production growth among OPEC members in 2019 and that crude oil output in Iraq will grow further in 2020. Increasing production capacity at the northern Kirkuk fields and the resumption of Baghdad-administered exports through the Iraqi-Kurdistan pipeline has helped alleviate export capacity issues, allowing for increased production.
EIA estimates that Iran’s crude oil and condensate production decreased by 1.7 million b/d since May 2018, when the United States announced its plan to withdraw from the Joint Comprehensive Plan of Action and reinstate sanctions in November 2018. U.S. sanctions on Iran’s exports of crude oil and non-crude liquids have forced Iran to store the liquids it cannot export or consume domestically. EIA assumes that U.S. sanctions on Iran’s oil exports will remain in place through the end of the forecast period.
Although Iran’s crude oil production declined at an average rate of 120,000 b/d per month since May 2018, EIA expects the decline rate to slow in the second half of 2019, as domestic Iranian consumption grows with power plants switching from natural gas to crude oil for electric power generation.
As of June 2019, Venezuela’s crude oil production stood at about 0.7 million b/d, its lowest level since early 2003, when production fell as a result of a general strike. Along with the falling crude oil production, Venezuela’s refineries have been operating at only a fraction of their nameplate capacities. Venezuela’s domestic consumption has decreased in the wake of the country’s deteriorating economic conditions. EIA expects Venezuela’s crude oil production to continue declining through the end of 2020.
Widespread power outages, inefficient management of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and the state-owned Petróleos de Venezuela (PdVSA) have accelerated declines. Venezuela’s extra-heavy crude oil requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Before the sanctions were imposed, the United States was the main source of diluent for Venezuela. The sanctions have severely restricted Venezuela’s ability to procure the needed diluent to continue producing the heavy crude oil.
In addition to the lack of diluent, Venezuela’s upgraders—complex processing units that upgrade the extra-heavy crude oil to help facilitate transport—have remained offline since early May, further affecting PdVSA’s ability to produce crude oil. EIA expects Venezuela’s production to continue decreasing through the forecast period because of deteriorating conditions within the country. EIA expects further production declines will also occur in response to the expiration of General License 8 on July 27, which granted exceptions to certain U.S. companies to continue operating in Venezuela.
In OPEC Africa, Nigeria is the only country EIA expects to see production increases through the end of 2020. In February 2019, production began at Nigeria’s offshore Egina project, which expects to ramp up to a peak output of 200,000 b/d by the end of 2019. EIA forecasts that Libya’s production will remain near current levels through the end of 2020, but the risk of a disruption is high. Libya saw production gains in the first half of 2019 as a result of a re-start at the El-Sharara oil field in March 2019 and development of both new and previously shut-in wells. However, supply disruptions remain a significant risk through 2020 because of the tentative security situation in the country and infrastructure that needs upgrades.
After averaging 5.3 million b/d in 2018, EIA expects that OPEC non-crude oil liquids production will decrease by 70,000 b/d in 2019 and further decrease by 0.2 million b/d to 5.0 million b/d in 2020. These totals do not include Qatar, a relatively large condensate producer that left OPEC in January 2019. The decline in non-crude oil liquids, mostly condensate related to natural gas production, is mainly the result of lower expected condensate output in Iran.
EIA expects OPEC surplus production capacity to average 1.7 million b/d in 2019 and 1.8 million b/d in 2020, up from an average of 1.5 million b/d in 2018. This estimate does not include additional capacity that may be available in Iran but is offline because of U.S. sanctions on Iran’s oil sales. The shut-in volumes in the Partitioned Neutral Zone, an area shared by Saudi Arabia and Kuwait, which have been offline since 2015, are also not included in the surplus production capacity totals. All of OPEC’s surplus production capacity in the second half of 2019 is expected to be in Saudi Arabia and Kuwait because the UAE is expected to be operating at capacity after increasing production from its Umm Lulu field in June.
Crude Oil Prices. The spot price of Brent crude oil averaged $64 per barrel (b) in June, down from an average of $71/b in both April and May. The recent price declines largely reflect increasing uncertainty about global oil demand growth as a result of increasingly weak global economic signals. Weakening oil demand, combined with strong supply growth in the United States, has helped build global oil inventories so far in 2019 and has limited any sustained upward pressure on oil prices. In terms of price formation in recent months, these factors have outweighed decreasing supply in Venezuela and Iran, the extension of the OPEC+ agreement through the first quarter 2020, as well as Saudi Arabia’s continued over-compliance with the existing OPEC+ agreements.
EIA estimates that global petroleum and other liquid fuels inventories rose by an average of 0.7 million b/d in 2018 and by an estimated 0.2 million b/d in the first half of 2019. EIA expects that strong growth in U.S. and other non-OPEC liquid fuels production, combined with slowing global oil demand growth, will contribute to a balanced market in the second half of 2019 and inventory builds of about 0.1 million b/d in 2020.
Given the expectation of relatively balanced markets during the second half of 2019, EIA forecasts Brent crude oil prices will remain near current levels, averaging $67/b from July through December of this year.
EIA’s forecast of global oil inventory builds increasing in 2020 puts some downward pressure on oil prices. However, EIA assumes that the downward pressure will be mostly offset by upward price pressures as a result of the IMO 2020 regulations taking effect and that Brent crude oil prices will continue to average $67/b in 2020.
Daily and monthly average crude oil prices could vary significantly from annual average forecasts because global economic developments and geopolitical events in the coming months have the potential to push oil prices higher or lower than the current STEO price forecast. EIA’s forecast assumes the OPEC+ agreement will remain in place through the end of the first quarter of 2020, with OPEC+ continuing to target a balanced market through the forecast period. However, the degree of adherence to those targets will be a significant driver of oil prices. In addition, supply disruptions are an ever-present feature of oil markets and can take large volumes off the global market. Venezuela and Libya are two places where events could cause production to drop quickly. Any disruptions to shipping through the Strait of Hormuz would also cause prices to increase.
Developments regarding the rate of economic growth and its effect on global oil demand further contribute to oil price uncertainty. During the third quarter, potential run reductions by refineries in China present a downside risk to crude oil prices. Also, although EIA expects crude oil price impacts from IMO 2020 to be limited, many unknowns remain about how the global refining and shipping industries will respond to the regulation and how those responses will affect crude oil prices. Finally, the U.S. tight oil sector continues to be dynamic, and quickly evolving trends in this sector could affect both current crude oil prices and expectations for future prices.
The discount of West Texas Intermediate (WTI) crude oil prices to Brent averaged about $10/b in May and June of 2019, but EIA expects that it will gradually fall to an average of $4/b by the fourth quarter of 2019. EIA forecasts average WTI crude oil prices to be $7/b lower than Brent prices in 2019 and $4/b lower than Brent prices in 2020. The price discount of WTI to Brent in the forecast is based on the assumption that increasing crude oil production in the Permian Basin and current constraints on the capacity to transport crude oil from production areas in West Texas and from Cushing, Oklahoma, to refineries and export terminals along the U.S. Gulf Coast will persist until the second half of 2019. At that point, EIA expects that new takeaway capacity will come online from West Texas to the Gulf Coast, which will reduce current distribution bottlenecks throughout Texas and Oklahoma.
The current values of futures and options contracts suggest significant uncertainty in the oil price outlook. WTI futures contracts for December 2019 delivery that were traded during the five-day period ending July 3 averaged $58/b, and implied volatility averaged 31%. These values established the lower and upper limits of the 95% confidence interval for the market's expectations of monthly average WTI prices in December 2019 at $40/b and $84/b, respectively.
