Oil prices will not average more than $80 per barrel in the second half of this year, despite the most recent production cut announced by Saudi Arabia, the U.S. Energy Information Administration (EIA) said in its latest Short-Term Energy Outlook (STEO) released this week.
At Sunday’s meeting, OPEC+ producers decided to extend their crude oil production cuts through 2024, while Saudi Arabia said it would voluntarily reduce its production by 1 million bpd in July to around 9 million bpd. The Saudi cut could be extended beyond July, Saudi Energy Minister, Prince Abdulaziz bin Salman, said.
Despite the Saudi cut and the extension of the current OPEC+ cuts through 2024, the EIA expects non-OPEC producers to drive global liquids production to growth of 1.5 million barrels per day (bpd) in 2023 and 1.3 million bpd in 2024, limiting the upside for oil prices. Production growth in the United States, Norway, Canada, Brazil, and Guyana will be the primary drivers of the increase in global liquids output.
The cuts, however, will result in draws in global oil inventories in each quarter between the third quarter of 2023 and the third quarter of 2024, the EIA reckons.
Oil inventories will drop slightly next year, compared to last month’s STEO that forecast inventory growth of 300,000 bpd for 2024.
This, the U.S. administration says, will put gradual pressure on oil prices.
But oil is not expected to rally, and Brent Crude prices will average $79 per barrel in the second half of 2023, which is $1 a barrel higher than in May’s STEO estimate. The 2024 oil price forecast was raised to an average of $84 per barrel, up by $9 per barrel compared to last month’s assessment. Related: Oil Moves Up Despite Rising Product Inventories
Early on Wednesday, Brent Crude prices traded just below $76 per barrel as the Saudi cut failed to lift prices with the market focused more on the economic slowdown instead of expectations of a tighter market further out this year.
Oil consumption will rise by 1.6 million bpd this year, and by another 1.7 million bpd next year, the EIA said, but noted that “Significant uncertainty remains around global economic growth and the potential impact on oil demand over the forecast period.”
The EIA also revised down its estimates for the U.S. economy and diesel consumption for this year and next.
The latest forecasts assume U.S. GDP growth of 1.3% in 2023 and 1.0% in 2024, which is down from last month’s forecast of 1.6% in 2023 and 1.8% in 2024, based on the S&P Global macroeconomic model for the U.S. economy and EIA’s energy price forecasts.
The reduction in forecast GDP growth has led to lowered estimates for distillate fuel – mostly diesel – consumption. The EIA now expects U.S. distillate consumption to fall in 2024, which is a change from last month’s forecast that had expected distillate consumption to grow next year.
“Recently, service sector production has been the primary driver of GDP growth, which requires less diesel consumption,” the EIA said in its discussion about diesel consumption and economic growth as part of the latest STEO.
“We expect this trend to continue; we forecast in our STEO that U.S. diesel consumption in the second half of 2023 will be below the 2015−2019 average before a slight further decline in 2024 despite an expected increase in GDP over the same periods.”
EIA’s forecast assumes that the Fed’s interest rate increases will slow inflation without causing major disruptions to U.S. employment or economic activity.
“If GDP growth does decline, we could see a further slowdown in U.S. diesel consumption,” the EIA noted.
Despite the Saudi attempts to further tighten the oil market and push prices higher, macroeconomic concerns about the U.S. and European economies and a possible slower-than-expected Chinese recovery continue to weigh on oil prices.