WASHINGTON — The U.S. Energy Information Administration (EIA) forecasts lower crude oil prices in the fourth quarter of 2019 and in 2020 despite tighter global balances.
The tighter balances are largely the result of unprecedented short-lived loss of global supply following the September 14 attacks on crude oil production and processing infrastructure in Saudi Arabia.
The production declines contribute to overall stock draws in the second half of 2019 with a relatively large stock draw in the third quarter. In the fourth quarter, however, EIA forecasts global supply growth will outpace global demand growth, resulting in an inventory build, offsetting some of the third quarter draws (Figure 1).
EIA lowered its crude oil price forecast for the fourth quarter of 2019 by $1 per barrel (bbl) to $59/bbl, reflecting current price trends, and lowered its crude oil price forecast for 2020 by $2/bbl to average $60/bbl because of expected supply growth.
In the October STEO, EIA forecasts total global petroleum stocks in the second half of 2019 will decrease by an average of 290,000 barrels per day (bpd), compared with the September STEO forecast stock build of 250,000 bpd for the same period. EIA forecasts total world crude oil and other liquids production for the second half of 2019 to average 101.3 million bpd, down by 550,000 bpd from the September STEO.
Most of the production decline is the result of lower output from Saudi Arabia, reducing the collective output of the Organization of the Petroleum Exporting Countries (OPEC) to 34.8 million bpd for the second half of 2019.
In the October STEO, EIA assumed the Abqaiq facility and Khurais oil field would produce at their pre-attack levels by the end of October. Compared with the September STEO, EIA revised OPEC spare capacity, most of which is located in Saudi Arabia, lower by an average of 200,000 bpd in the second half of 2019. Saudi Arabia’s total capacity (including spare capacity) declined following the Abqaiq attack, and EIA expects Saudi Arabia will use some of its remaining spare capacity to backfill inventories and lost production through the end of 2019. Beginning in January 2020, EIA forecasts that OPEC spare capacity will return above 2.0 MMbpd.
Crude oil prices increased sharply following the attacks; Brent front-month futures prices rose by nearly 15% on Monday, September 16, the first day of post-attack trading. This increase was the largest one-day percentage increase on record for Brent front-month futures prices.
The increase was larger in the front months of the futures strip than in the later months, indicating the market expected the outage to be relatively short lived, and prices fell quickly after the attack (Figure 2). Saudi Arabia continued to export crude oil by drawing from inventories, increasing production in other fields, and reducing domestic refinery inputs. Abqaiq’s relatively quick return to operations likely lessened the extent and duration of the price increases. Brent front-month futures prices fell to lower than pre-attack levels on October 1, settling at $59/bbl for the December contract and have fallen slightly since then.
The relatively quick return to pre-attack price levels likely reflects demand-side concerns and increased down-side price risk. Despite tighter forecast global petroleum markets in the second half of 2019, EIA expects that the Brent crude oil price will average $60.63/bbl in the second half of 2019, nearly unchanged from the $60.68/bbl forecast in the September STEO. EIA forecasts that global petroleum inventories will increase by nearly 550,000 bpd in the first half of 2020, which is expected to put downward pressure on crude oil prices. EIA forecasts the price of Brent crude oil to average $57.34/bbl during the first half of 2020. However, EIA expects the price of Brent crude oil to increase to $62.48/bbl in the second half of 2020 as global petroleum stock builds slow and petroleum balances are relatively tighter than during the first half of the year.
The price forecast is highly uncertain and supply or demand factors may emerge that could move prices higher or lower than EIA’s current STEO forecast. Driven by revisions to global economic outlook, EIA has revised its 2019 liquid fuels demand growth outlook lower in the STEO for the last nine consecutive months and 2020 consumption has been revised down eight of the last nine months. EIA’s price forecast also accounts for a higher level of petroleum supply risk in the aftermath of the attacks in Saudi Arabia.