EIA warns of rising light oil production and shortage of heavy sour crude
In this month's Short Term Energy Outlook, the Energy Information Administration (EIA) warns that rising output from the US will more than offset losses from other global producers, returning global oil markets to a surplus situation later this year.
More growth expected from the Permian
According to the EIA, US output hit a record 12 million bbl/day in January, slightly higher than its preliminary weekly estimate of 11.9 million bbl/day. The agency bumped up its full year production forecast to 12.4 million bbl/day this year, rising to 13.2 million bbl/day in 2020. Those figures are 300,000 bbl/day higher than its previous forecast.
Most of that growth will come from the Permian region. The EIA says it sees improved well productivity in the Permian Basin and the Gulf of Mexico, as well as a lessening effect of pipeline constraints in Texas.
Net imports of crude and petroleum products are expected to decline from an average of 2.4 million bbl/day in 2018, to less than 1 million bbl/day by the end of this year. By the fourth quarter of 2020, the US is poised to be a net exporter of about 1.1 million bbl/day.
Falling production almost everywhere else
Aside from OPEC's pact with Russia to reduce output by 1.2 million bbl/day this year, the EIA estimates Canada's production was cut by about 400,000 bbl/day in January due to Alberta's curtailment program.
Over 2.5 million bbl/day of output is currently offline, with about half of those lost barrels coming from Iran.
US sanctions on Venezuela’s state-owned oil producer PDVSA has yet to dent output, but has the potential to disrupt trade flows and increases the risk of a supply shortage.
Global petroleum inventories are also expected to fall by 1.3 million bbl/day in February, but return to a surplus situation through the remainder of the year. The EIA estimates global inventories will build by about 1 million barrels through the end of next year.
Global shortage of medium to heavy sour crude
Cuts from OPEC, Canada and potentially Venezuela have increased the price of medium and heavy crude oils. The Mars benchmark, a medium, sour crude produced in the Gulf of Mexico, has moved to above par with Light Louisiana Sweet.
Western Canadian Select (WCS) prices in the Gulf Coast also rose above par with the West Texas Intermediate (WTI) benchmark at the end of January. WCS trades at a US$10/bbl discount to WTI in Alberta, but now sells at a US$1.50 premium in Houston.
A similar effect is being seen globally, as several medium to heavy sour crude grades produced in the Middle East are now trading at a premium to Brent.
WCS IN HOUSTON VS WTI BENCHMARK (USD/BBL)
Lower forecast for oil prices as global surplus remains
Despite a shortage of heavy sour crude in the short term, world oil markets remain oversupplied over the next two years. As a result, the EIA reduced its 2020 oil price forecasts by about US$3 a barrel for both WTI and Brent, falling to an average of US$58 and US$62, respectively.