Long-Term Outlook Is Bullish for Oil and Natural Gas Prices

  1. OPEC+ supply limits appear to be working.
  2. Refiners are adjusting balances by controlling yields.
  3. Gasoline demand may have topped out.
  4. Natural gas production is expected to exceed consumption.

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Alan Levine—Chairman, Powerhouse
(202) 333-5380


The Matrix

Futures prices are moving higher in the near term, reflecting efforts by OPEC+ to limit production of crude oil. The impact of the expected success of COVID-19 vaccines on product demand has added to the bullish price outlook as well.

Regulation of the balance between crude oil supply and product demand has been the task of the refiner. The shock of the economic lockdown hit markets hard. Refineries would have been operating typically around 90% of capacity in May. U.S. refineries moved utilization to 67.9% of capacity in May 2020.

Reopening of refineries has advanced only slowly. Now, in February 2021, U.S. refineries are operating at 83% of capacity. This helps support product prices and also affected spring gasoline crack spreads.

June 2021 gas cracks are trading around $17.65 as the market paused for Presidents’ Day. The spread bottomed at $11.88 early in November. It has since moved steadily higher, touching $18.14 in January 2021 before its most recent setback. Technical analysis puts a near-term top around $20.


Long-term assessments

A longer time frame is available from the Energy Information Administration, which has offered a bullish crude oil supply assessment for 2023. In the EIA’s 2021 annual energy outlook, the agency projected that U.S. crude oil production would exceed 12.25 million barrels daily in 2023.

Growth in domestic crude oil supply, according to EIA, could be running into consumption problems within the United States. Gasoline demand will be under pressure, reflecting major policy shifts away from national petroleum supply and demand in favor of power and transportation from renewable sources.

Consumption of gasoline is slated to average 8.97 million barrels daily in 2021. (Gasoline demand hit 9.33 million barrels per day in 2018. EIA believes this will be the high-water mark for demand.) Subsequently, EIA expects gasoline demand to fall through 2050.

Here are the U.S. supply/demand data released by the EIA for the week ended February 5, 2021.

Total commercial stocks of petroleum fell by 11.2 million barrels during the week ended February 5, 2021.

Commercial crude oil supplies in the United States decreased by 6.6 million barrels from the previous report week to 469 million barrels.

Crude oil inventory changes by PAD District:

PADD 1: Down 1.1 million barrels to 10 million barrels

PADD 2: Down 0.9 million barrels to 134.6 million barrels

PADD 3: Down 4.6 million barrels to 251 million barrels

PADD 4: Plus 0.4 million barrels to 24.7 million barrels

PADD 5: Down 0.6 million barrels to 48.6 million barrels

Cushing, Oklahoma inventories were down 0.7 million barrels from the previous report week to 48 million barrels.

Domestic crude oil production was up 100,000 barrels per day from the previous report week to 11 million barrels daily.

Crude oil imports averaged 5.857 million barrels per day, a daily decrease of 650,000 barrels. Exports decreased 866,000 barrels daily to 2.617 million barrels per day.

Refineries used 83% of capacity, up 0.7% from the previous report week.

Crude oil inputs to refineries increased 152,000 barrels daily; there were 14.793 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 123,000 barrels daily to 15.258 million barrels daily.

Total petroleum product inventories fell 4.6 million barrels from the previous report week.

Gasoline stocks increased 4.3 million barrels daily from the previous report week; total stocks are 256.4 million barrels.

Demand for gasoline rose 87,000 barrels per day to 7.857 million barrels per day.

Distillate fuel oil stocks were fell 1.7 million barrels from the previous report week; distillate stocks are at 161.1 million barrels. EIA reported national distillate demand at 4.308 million barrels per day during the report week, an increase of 110,000 barrels daily.

Propane stocks decreased 4.5 million barrels from the previous report week; propane stocks are 51.5 million barrels. The report estimated current demand at 2.204 million barrels per day, an increase of 714,000 barrels daily from the previous report week.


Natural Gas

The Department of Energy’s forecast for record-setting crude oil production in 2023 carries similar expectations for natural gas output. DOE projects that gas consumption will grow at around 0.5% annually. This yields demand of 35.4 Tcf in 2050. Production is anticipated to grow more rapidly, reaching 43 by 2050.

The difference leaves 7.6 Tcf of natural gas to be stored or exported into the fast-growing U.S. LNG business. EIA expects LNG exports to grow at to 5.0 Tcf in 2035. Growth in LNG exports is expected to then to hold that level until 2050.

According to the EIA:

The net [natural gas] withdrawals from storage totaled 171 Bcf for the week ended February 5, compared with the five-year (2016–2021) average net withdrawals of 125 Bcf and last year’s net withdrawals of 121 Bcf during the same week. Working natural gas stocks totaled 2,518 Bcf, which is 152 Bcf more than the five-year average and 9 Bcf lower than last year at this time.

The average rate of withdrawals from storage is 3% higher than the five-year average so far in the withdrawal season (November through March). If the rate of withdrawals from storage matched the five-year average of 10.4 Bcf/d for the remainder of the withdrawal season, the total inventory would be 1,958 Bcf on March 31, which is 152 Bcf higher than the five-year average of 1,806 Bcf for that time of year.